Filed Pursuant to Rule 424(b)(3)
Registration No. 333-92949
IDM ENVIRONMENTAL CORP.
396 Whitehead Avenue
South River, New Jersey 08882
(732) 390-9550
________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 28, 2000
________________
We will hold a special meeting of stockholders of IDM Environmental Corp.
at 10:00 a.m., local time, on Tuesday, March 28, 2000 at the Brunswick Hilton, 3
Tower Center Drive, East Brunwick, New Jersey 08816 for the following purposes:
1. To consider and vote upon a proposal to approve the terms of a Plan of
Reorganization and Merger by and among IDM Environmental Corp., Fusion Networks
Holdings, Inc. ("FNHI"), a wholly-owned subsidiary of IDM, and IDM Merger
Subsidiary, Inc., pursuant to which a holding company structure will be formed
with IDM becoming a wholly-owned subsidiary of FNHI;
2. To consider and vote upon a proposal to approve the terms of an
Agreement and Plan of Merger by and among FNHI, Fusion Networks, Inc. and
IDM/Fusion Acquisition Corporation, a wholly-owned subsidiary of FNHI, pursuant
to which Fusion Networks, Inc. will become a wholly-owned subsidiary of FNHI;
3. To consider and vote upon a proposal to authorize an amendment to the
IDM Environmental Corp. 1998 Comprehensive Stock Option and Award Plan, as
assumed by FNHI, which will (a) increase the number of shares of common stock
reserved for issuance under such plan by an additional 1,600,000 shares, and (b)
fix 400,000 as the maximum number of shares which may be subject to awards
granted under the 1998 Stock Option Plan to any individual in any calendar year;
and
4. To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
Your board of directors has determined that the proposed transactions are
advisable and in the best interests of IDM and you, and unanimously recommends
that you vote to approve the transactions.
We describe the proposals more fully in the accompanying joint proxy
statement/prospectus, which we urge you to read.
Only IDM stockholders of record at the close of business on February 24,
2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement.
<PAGE>
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy and
mail it promptly in the postage-paid envelope provided, whether or not you plan
to attend the special meeting in person. You may revoke your proxy in the manner
described in the accompanying joint proxy statement/prospectus at any time
before it has been voted at the special meeting. You may vote in person at the
special meeting even if you have returned a proxy.
By Order of the Board of Directors
FRANK FALCO
Secretary
South River, New Jersey
February 28, 2000
<PAGE>
FUSION NETWORKS, INC.
8115 N.W. 29th Street
Miami, Florida 33122
(305) 477-6701
________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 27, 2000
________________
We will hold a special meeting of stockholders of Fusion Networks, Inc. at
10:00 a.m., local time, on Monday, March 27, 2000 at the corporate offices of
Fusion Networks, Inc. at 8115 N.W. 29th Street, Miami, Florida 33122 for the
following purposes:
1. To consider and vote upon a proposal to approve the terms of an
Agreement and Plan of Merger by and among Fusion Networks, Inc., Fusion Networks
Holdings, Inc. ("FNHI") and IDM/Fusion Acquisition Corporation, a wholly-owned
subsidiary of FNHI, pursuant to which Fusion Networks, Inc. will become a
wholly-owned subsidiary of FNHI; and
2. To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
Your board of directors has determined that the proposed transactions are
advisable and in the best interests of Fusion Networks and you, and unanimously
recommends that you vote to approve the transactions.
We describe the proposals more fully in the accompanying joint proxy
statement/prospectus, which we urge you to read.
Only Fusion Networks stockholders of record at the close of business on
February 24, 2000 are entitled to notice of and to vote at the special meeting
or any adjournment or postponement.
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy and
mail it promptly in the postage-paid envelope provided, whether or not you plan
to attend the special meeting in person. You may revoke your proxy in the manner
described in the accompanying joint proxy statement/prospectus at any time
before it has been voted at the special meeting. You may vote in person at the
special meeting even if you have returned a proxy.
By Order of the Board of Directors
ENRIQUE BAHAMON
Secretary
Miami, Florida
February 28, 2000
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[LOGO OF IDM ENVIRONMENTAL CORP.] [LOGO OF FUSION NETWORKS, INC.]
PROSPECTUS
of
FUSION NETWORKS HOLDINGS, INC.
___________________________________
PROXY STATEMENT
of
IDM ENVIRONMENTAL CORP.
___________________________________
PROXY STATEMENT
of
FUSION NETWORKS, INC.
___________________________________
This Proxy Statement/Prospectus relates to the solicitation of proxies by the
board of directors of IDM for use at a special meeting of holders of IDM common
stock to be held at 10:00 a.m., eastern time, on Tuesday, March 28, 2000, at the
Brunswick Hilton, 3 Tower Center Drive, East Brunswick, New Jersey 08816 and at
any adjournments and postponements of the special meeting. IDM is holding the
special meeting to consider and act upon a proposal to approve a holding company
reorganization and merger. IDM is also seeking approval of an amendment to a
stock option plan.
This Proxy Statement/Prospectus also relates to the solicitation of proxies by
the board of directors of Fusion Networks for use at a special meeting of
holders of Fusion Networks common stock to be held at 10:00 a.m., eastern time,
on Monday, March 27, 2000, at the corporate offices of Fusion Networks, Inc. at
8115 N.W. 29th Street, Miami, Florida 33122 and at any adjournments and
postponements of the special meeting. Fusion Networks is holding the special
meeting to consider and act upon a proposal to approve a merger.
Following the holding company reorganization and merger, IDM and Fusion Networks
will each be wholly-owned subsidaries of Fusion Networks Holdings, Inc., or
FNHI.
Pursuant to the terms of the holding company reorganization and merger, IDM
stockholders will receive one share of FNHI common stock in exchange for each
share of IDM common stock that they own and Fusion Networks stockholders will
receive one share of FNHI common stock in exchange for each share of Fusion
Networks common stock that they own.
This Proxy Statement/Prospectus is also a prospectus of FNHI relating to FNHI
common shares to be issued to IDM stockholders and Fusion Networks stockholders
in the holding company reorganization and merger
FNHI has applied for its shares to be approved for quotation on the Nasdaq
National Market under the symbol "FSUN."
Please pay particular attention to the "Risk Factors" section beginning on page
7 of this proxy statement/prospectus which describes risks that you should
consider in deciding whether to vote for the merger.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the merger described in this Joint Proxy
Statement/Prospectus or the Fusion Networks Holdings common stock to be issued
in the merger, nor have they determined if this Joint Proxy Statement/Prospectus
is accurate or adequate. Furthermore, the Securities and Exchange Commission has
not determined the fairness or merits of the merger. Any representation to the
contrary is a criminal offense.
We are mailing this Joint Proxy Statement/Prospectus and accompanying form of
proxy to the stockholders of IDM and Fusion Networks on or about
February 29, 2000.
Joint Proxy Statement / Prospectus dated February 24, 2000
<PAGE>
TABLE OF CONTENTS
Page
-------
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................. 1
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY................................ 2
RISK FACTORS............................................................ 7
Risks Related to Fusion Networks....................................... 7
Risks Related to IDM................................................... 13
Risks Related to the Merger............................................ 17
COMPARATIVE PER SHARE DATA.............................................. 20
MARKET PRICE INFORMATION................................................ 21
THE IDM SPECIAL MEETING................................................. 22
General............................................................... 22
Date, Time and Place.................................................. 22
Matters to be Considered at the Special Meeting....................... 22
Record Date........................................................... 22
Voting of Proxies..................................................... 22
Votes Required........................................................ 23
Quorum; Abstentions and Broker Non-Votes.............................. 23
Solicitation of Proxies and Expenses.................................. 23
Board Recommendation.................................................. 23
THE FUSION NETWORKS SPECIAL MEETING..................................... 24
General............................................................... 24
Date, Time and Place.................................................. 24
Matters to be Considered at the Special Meeting....................... 24
Record Date........................................................... 24
Voting of Proxies..................................................... 24
Votes Required........................................................ 25
Quorum; Abstentions and Broker Non-Votes.............................. 25
Solicitation of Proxies and Expenses.................................. 25
Board Recommendation.................................................. 25
THE MERGER.............................................................. 26
Background of the Merger.............................................. 26
Reasons for the Merger; Recommendations of the Boards of Directors.... 28
Opinion of Financial Advisor to IDM................................... 30
Interests of Certain Persons in the Merger............................ 36
Material Federal Income Tax Considerations............................ 36
Anticipated Accounting Treatment...................................... 38
Dissenters' Rights.................................................... 38
Listing of Common Stock to be Issued in the Merger.................... 43
Restrictions on Sale of Shares By Affiliates of IDM and Fusion Networks 43
Operations Following the Merger....................................... 43
THE MERGER AGREEMENT AND RELATED AGREEMENTS............................. 44
The Holding Company Reorganization.................................... 44
The Merger............................................................ 44
Effective Time........................................................ 44
Conversion of Stock; Treatment of Options, Warrants and Derivative
Securities............................................................ 44
Exchange of Stock Certificates........................................ 45
Representations and Warranties........................................ 45
Certain Covenants..................................................... 45
Conditions to Completion of the Merger................................ 49
Termination of the Merger Agreement................................... 51
Amendment and Waiver.................................................. 52
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IDM ENVIRONMENTAL CORP. SUMMARY HISTORICAL FINANCIAL DATA............... 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IDM....................................... 54
FUSION NETWORKS, INC. SUMMARY HISTORICAL FINANCIAL DATA................. 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUSION NETWORKS........................... 66
SUMMARY UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA........ 69
BUSINESS AND PROPERTIES OF IDM.......................................... 73
BUSINESS AND PROPERTIES OF FUSION NETWORKS.............................. 91
MANAGEMENT.............................................................. 106
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........ 114
DESCRIPTION OF FNHI CAPITAL STOCK....................................... 116
COMPARISON OF RIGHTS OF HOLDERS OF IDM COMMON STOCK AND
FUSION NETWORKS COMMON STOCK AND FNHI COMMON STOCK..................... 118
PROPOSED AMENDMENT TO IDM'S 1998 COMPREHENSIVE
STOCK OPTION AND AWARD PLAN............................................ 124
EXPERTS................................................................. 132
LEGAL MATTERS........................................................... 132
WHERE YOU CAN FIND MORE INFORMATION..................................... 133
INDEX TO FINANCIAL STATEMENTS........................................... 134
APPENDICES
A Plan of Reorganization and Merger
B Agreement and Plan of Merger
C First Amendment to Agreement and Plan of Merger
D Second Amendment to Agreement and Plan of Merger
E Third Amendment to Agreement and Plan of Merger
F Fourth Amendment to Agreement and Plan of Merger
G Opinion of Chartered Capital Advisers, Inc., financial advisor to IDM
H Amended and Restated Certificate of Incorporation of Fusion Networks
Holdings, Inc.
I Bylaws of Fusion Networks Holdings, Inc.
J Amended IDM Environmental Corp. 1998 Comprehensive Stock Option and Award
Plan
K Section 262 of the Delaware General Corporation Law
L Section 14A:11 of the New Jersey Business Corporation Act
ii
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are IDM and Fusion Networks
proposing to merge?
A: Because we believe the combined company
offers benefits, including diversification of
operations and access to capital, which we
believe will maximize the value to the
stockholders of both IDM and Fusion
Networks. For IDM, the merger provides
exposure to the Internet through what we
believe to be a company which has positioned
itself well to capture market share and the
potential associated revenue, growth and
valuation benefits. For Fusion Networks, the
merger provides an attractive vehicle to raise
capital to fund its network roll out.
Q: What will IDM stockholders receive in the
merger?
A: If the merger is completed, stockholders of
IDM will receive one share of FNHI common
stock for each share of IDM common stock
they own.
Q: What will Fusion Networks stockholders
receive in the merger?
A: If the merger is completed, stockholders will
receive one share of FNHI common stock for
each share of Fusion Networks common stock
they own.
Q: What risks should I consider?
A: You should review "RISK FACTORS" on
pages 7 through 19 for a discussion of
various risks associated with the merger and
the operations of IDM and Fusion Networks.
Q: When do you expect to complete the
merger?
A: We are working to complete the merger during
the first quarter of 2000. Because the merger is
subject to various conditions, however, we
cannot predict the exact timing.
Q: Should stockholders send in their stock
certificates now?
A: No. After we complete the merger, FNHI will
send instructions to IDM stockholders and
Fusion Networks stockholders explaining how
to exchange their shares of IDM and Fusion
Networks common stock for the appropriate
number of shares of FNHI common stock.
<PAGE>
Q: Who can I call with questions?
A: If you are an IDM shareholder with questions
about the merger, please call Michael Killeen at
(732) 390-9550.
If you are a Fusion Networks stockholder with
questions about the merger, please call Enrique
Bahamon at (305) 477-6701.
1
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JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
The following summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. You should carefully read this entire joint proxy
statement/prospectus, including the appendices, and the other documents we refer
to for a more complete understanding of the merger.
The Companies
- -- IDM Environmental Corp. (See page 73)
396 Whitehead Avenue
South River, New Jersey 08882
(732) 390-9550
IDM 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.
- -- Fusion Networks, Inc. (See page 91)
8115 N.W. 29th Street
Miami, Florida 33122
(305) 477-6701
Fusion Networks is a start-up Internet company
founded to provide improved Internet content and
services to Latin American markets and to the Spanish
and Portugese speaking population around the world.
Fusion Networks launched its Internet site,
LatinFusion.com, on a pilot basis, in Bogota, Colombia
in October 1999, and plans similar launches in targeted
cities and regions in the Americas and Europe.
The Merger (See page 26)
IDM and Fusion Networks have entered into a merger
agreement that provides for the formation of a holding
company, known as Fusion Networks Holdings, by
IDM and the merger of Fusion Networks and a newly
formed subsidiary of Fusion Networks Holdings. As a
result, both IDM and Fusion Networks will become
wholly owned subsidiaries of Fusion Networks
Holdings. You are encouraged to read the merger
agreement, as amended, a copy of which is attached
hereto as Appendix A, B, C, D, E and F.
The Special Meetings (See page 22)
IDM Stockholders. A special meeting of the
stockholders of IDM will be held on Tuesday, March 28,
2000 at 10:00 a.m., local time, at the Brunswick Hilton,
3 Tower Center Drive, East Brunswick, New Jersey 08816.
At the IDM special meeting,
stockholders will be asked:
1. to approve the terms of the holding company
reorganization pursuant to which IDM will
become a wholly-owned subsidiary of FNHI;
2. to approve the terms of the merger agreement
and the merger, pursuant to which Fusion
Networks, Inc. will become a wholly-owned
subsidiary of FNHI;
3. to approve an amendment to the IDM 1998
Stock Option Plan, as assumed by FNHI, which
will increase the number of shares of common
stock reserved for issuance under such plan by
1,600,000 shares and fix a maximum of
400,000 shares which may be subject to awards
granted under the 1998 Stock Option Plan to
any individual in any calendar year. (See page
124)
Fusion Networks Stockholders. A special meeting of the
stockholders of Fusion Networks will be held on
Monday, March 27, 2000 at 10:00 a.m., local time, at the
corporate offices of Fusion Networks, Inc. at 8115 N.W.
29th Street, Miami, Florida 33122. At the Fusion
Networks special meeting, you will be asked to approve
the terms of the merger agreement and the merger,
pursuant to which Fusion Networks, Inc. will become a
wholly-owned subsidiary of FNHI.
2
<PAGE>
Record Date; Voting Power; Vote Required (See
pages 22 and 24)
IDM Stockholders. You can vote at the special meeting
of IDM stockholders if you owned IDM common stock
at the close of business on February 24, 2000. You can
cast one vote for each share of IDM common stock that
you owned at that time.
To approve the merger agreement and merger, the
holders of a majority of those shares voting at the
meeting must vote in favor of doing so. As additional
requirements of approval of the merger, the
stockholders of IDM must approve the holding
company reorganization and the proposed amendment
to the IDM 1998 Stock Option Plan. To approve the
holding company reorganization and amend the IDM
1998 Stock Option Plan, the holders of a majority of
shares of IDM common stock allowed to vote at the
meeting must vote in favor of doing so.
You may vote your shares in person by attending the
special meeting or by mailing us your proxy if you are
unable or do not wish to attend. You can revoke your
proxy at any time before we take a vote at the meeting
by sending a written notice revoking the proxy or a
later-dated proxy to the secretary of IDM, or by
attending the special meeting and voting in person.
Fusion Networks Stockholders. You can vote at the
special meeting of Fusion Networks stockholders if you
owned Fusion Networks common stock at the close of
business on February 24, 2000. You can cast one vote
for each share of Fusion Networks common stock that
you owned at that time.
To approve the merger agreement and merger, the
holders of a majority of those shares voting at the
meeting must vote in favor of doing so.
You may vote your shares in person by attending the
special meeting or by mailing us your proxy if you are
unable or do not wish to attend. You can revoke your
proxy at any time before we take a vote at the meeting
by sending a written notice revoking the proxy or a
later-dated proxy to the secretary of Fusion Networks,
or by attending the special meeting and voting in
person.
Opinion of Financial Advisor (See page 30)
In deciding to approve the merger, IDM's board of
directors considered, among various other factors
described below in "Reasons for the Merger;
Recommendations of the Board of Directors," an
opinion from a financial advisor.
On August 18, 1999, Chartered Capital Advisers, IDM's
financial advisor, delivered its opinion to the IDM board
that, as of that date, the exchange ratio in the merger was
fair from a financial point of view to IDM. The full text
of the written opinion of Chartered Capital Advisers,
dated August 18, 1999, which sets forth assumptions
made, matters considered and limitations on the review
undertaken in connection with the opinion, is attached as
Appendix G. You should read this opinion in its
entirety. The opinion of Chartered Capital Advisers does
not constitute a recommendation as to how any IDM
stockholder should vote with respect to the merger.
Conditions To Completion Of The Merger (See page
49)
The respective obligations of the parties to complete the
merger are subject to approval of the merger, as well as
the holding company reorganization and amendment of
the IDM 1998 Stock Option Plan by IDM stockholders
and approval of the merger by Fusion Networks
stockholders, as well as the prior satisfaction or waiver
(if permitted by applicable law) of conditions specified
in the merger agreement. The following conditions,
among others, must be satisfied or waived before the
merger can be completed:
* all necessary consents, approvals and
authorizations from governmental entities must
be obtained except where a failure to obtain any
such consent, approval or authorization could
not be reasonably expected to have a material
adverse effect on IDM or Fusion Networks;
* no court of competent jurisdiction or
governmental entity has issued or entered any
order, writ, injunction or decree prohibiting or
preventing its completion;
3
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* our respective representations and warranties
in the merger agreement must have been
materially true and correct at the date the
merger agreement was executed and must
remain materially true and correct;
* we must perform and comply in all material
respects with our respective covenants in the
merger agreement;
* IDM must have obtained an opinion from its
tax counsel stating that the merger will qualify
as a tax-free reorganization;
* no event, change, condition or effect that is or
is reasonably likely to be materially adverse to
either company or its subsidiaries, taken as a
whole, occurs; and
* IDM's board must have received an opinion
from its financial advisor to the effect that the
terms of the merger are fair to IDM and its
shareholders from a financial point of view.
Termination of the Merger Agreement (See page
51)
The merger agreement may be terminated:
* if IDM and Fusion Networks agree to
terminate it; or
* by either of us if the conditions to completion
of the merger would not be satisfied because
of a breach of a representation, warranty,
covenant or agreement in the merger
agreement by the other party, if the breaching
party does not take reasonable steps within
fifteen days to cure the breach.
In addition, the merger agreement may be
terminated by either of us under any of the following
circumstances:
* if the merger is not completed by March 31,
2000, subject to extension by either party to
June 30, 2000 under certain circumstances;
* if a final court or governmental order
prohibiting the merger is issued and is not
appealable;
* if the IDM stockholders do not approve the
merger and related matters at the IDM special
meeting; or
* if the Fusion Networks stockholders do not
approve the merger at the Fusion Networks
special meeting.
Waiver and Amendment (See page 52)
We may jointly amend the merger agreement and each of
us may waive our right to require the other party to
adhere to the terms and conditions of the merger
agreement, other than the condition that IDM obtain an
opinion from its tax counsel that the merger will
qualify as a tax-free reorganization.
Restrictions on Alternative Transactions (See page
47)
Subject to limited exceptions, the merger agreement
prohibits each party from soliciting or participating in
discussions with third parties about transactions that may
prohibit consummation of the merger. In addition, each
company is obligated to notify the other party of
information of such transactions. The restrictions,
however, do not prohibit the boards from taking such
actions as are necessary to fulfill their respective
fiduciary duties.
Management and Operations Following the Merger
(See page 43)
Following the merger, IDM and Fusion Networks will
continue to carry on their historical operations in
substantially the same manner as they were carried on
prior to the merger with each company operating as a
wholly-owned subsidiary of FNHI.
The present managements of each company will initially
continue to manage their respective companies and the Chief
Executive Officer and Chief Financial Officer of Fusion
Networks will assume the same positions with FNHI. The
board of directors of FNHI will be comprised of six
members with three members to be selected by Fusion
Networks and two members to be selected by IDM.
4
<PAGE>
Stock Ownership of Management and Certain
Stockholders (See page 114)
On the record date, directors and executive officers of
IDM may be deemed to be the beneficial owners of
approximately 1.3% of the voting power of IDM. Each
of the directors and executive officers who hold common
stock of IDM have indicated that they intend to vote for
the merger and each of the other proposals submitted to
the IDM stockholders.
On the record date, directors and executive officers of
Fusion Networks may be deemed to be the beneficial
owners of approximately 24.9% of the voting power of Fusion
Networks. Each of the directors and executive officers
who hold common stock of Fusion Networks have indicated
that they intend to vote for the merger and each of the
other proposals submitted to the Fusion Networks stockholders.
Interests of Certain Persons in the Merger (See
page 36)
When considering the recommendation of the IDM and
Fusion Networks boards, you should be aware that
some directors and officers of IDM and Fusion
Networks have the following interests in the merger
that are different from, or in addition to, yours:
* Upon consummation of the merger, the
directors and officers of Fusion Networks and
their affiliates will beneficially own
approximately 22.4% of the then outstanding
shares of FNHI common stock.
* Included in the terms of the merger agreement
is a requirement that the shareholders of IDM
approve a 1,600,000 share increase in the
number of shares reserved for issuance under
IDM's 1998 Stock Option Plan, which plan
will be assumed by FNHI, of which 500,000
options each had been granted to Frank Falco
and Joel Freedman, the principal officers of
IDM. See "Securities Ownership of Certain
Beneficial Owners and Management" and
"Description of FNHI Capital Stock" for a
description of the outstanding IDM stock
options that will become FNHI stock options
upon consummation of the merger.
* The merger agreement provides that Fusion
Networks shall be entitled to designate three
individuals to the FNHI board of directors and
IDM shall be entitled to designate two
individuals to the FNHI board of directors.
* The merger agreement also provides that FNHI
and Fusion Networks will guarantee, for a
period of three years, up to $50,000 of salary,
each, payable under existing employment
agreements of Frank Falco and Joel Freedman
with IDM.
United States Federal Income Tax Consequences of
the Holding Company Reorganization and Merger
(See page 36)
The holding company reorganization and merger have
been structured so that no gain or loss will be recognized
for federal income tax purposes on the exchange of
shares of IDM common stock and Fusion Networks
common stock for shares of FNHI common stock, as the
case may be, except to the extent holders exercise
dissenter's rights.
Anticipated Accounting Treatment of the Merger
(See page 38)
The holding company reorganization and merger are
expected to be accounted for using the purchase method
of accounting in accordance with generally accepted
accounting principles. Fusion Networks will be deemed
the acquiror for accounting and financial reporting purposes.
5
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Restrictions on the Ability to Sell FNHI Stock (See
page 43)
All shares of FNHI common stock issued in connection
with the merger will be freely transferable unless the
holder is considered an "affiliate" of either IDM or
Fusion Networks for purposes of the Securities Act of
1933. Shares of common stock held by these affiliates
may be sold only pursuant to a registration statement or
exemption under the Securities Act.
Dissenters' Rights (See page 38)
- - IDM Shareholders
Under New Jersey law, IDM's common stockholders may
have the right to an appraisal of the value of their
shares of common stock in connection with the holding
company reorganization. A discussion of these right is
included on pages 38 through 40. We encourage IDM
common stockholders to read it.
- - Fusion Networks Stockholders
Under Delaware law, Fusion Networks' common
stockholders may have the right to an appraisal of the value
of their shares of common stock in connection with the
merger. A discussion of these rights is included on
pages 40 through 41. We encourage Fusion Networks
common stockholders to read it.
Forward-Looking Statements in this Joint Proxy
Statement/Prospectus
This joint proxy statement/prospectus contains
forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform
Act of 1995 with respect to IDM's financial condition,
results of operations and business. The safe harbor provision
of this Act do not apply to FNHI or Fusion Networks. Words
such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions
indicate forward-looking statements. These forward-looking
statements are not guarantees of future performance and
are subject to risks and uncertainties that could cause
actual results to differ materially from the results
contemplated by the forward-looking statements. In
evaluating the merger, you should carefully consider the
discussion of risks and uncertainties in the section
entitled "Risk Factors" on page 7.
Dividend Information (See page 19)
Neither IDM nor Fusion Networks has ever paid any
cash dividends on its stock, and FNHI anticipates that it
will continue following the merger to retain any earnings
for the foreseeable future for use in the operation of its
business.
6
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RISK FACTORS
The securities to be issued and the transactions which are the subject of
this joint proxy statement/prospectus are subject to numerous risk factors. In
addition to the other information contained in this joint proxy
statement/prospectus, you should carefully consider the following risk factors
in deciding whether to vote for the merger and the related transactions
described herein. If any of the following risks actually occur, the business and
prospects of IDM or Fusion Networks may be seriously harmed. In such case, the
trading price of FNHI common stock could decline, and you may lose all or part
of your investment.
Risks Related to Fusion Networks
Company Risks
We have only been in business for a short period of time, so your basis for
evaluating our company is limited.
We have only an extremely limited operating history for you to evaluate our
business. We were incorporated in July 1999 and launched the LatinFusion.com web
site on a pilot basis in October 1999. Other than development of our business
plan and steps taken to implement that business plan, we have conducted limited
operations since inception and, as of December 31, 1999 had generated no
operating revenues.
You must consider the risks, expenses and uncertainties that an early stage
Internet company like ours faces. These risks include our ability to:
* fund the proposed expansion of the LatinFusion.com network in new
markets;
* increase awareness of the LatinFusion.com brand and continue to
build user loyalty;
* expand the content and services on our network;
* attract a larger audience to our network;
* attract a large number of advertisers from a variety of industries;
* maintain our current, and develop new, strategic relationships;
* respond effectively to competitive pressures; and
* continue to develop and upgrade our technology.
We cannot assure you that we will be successful or that we will be able
effectively to compete and achieve market acceptance or otherwise address the
risk factors disclosed in this proxy statement/prospectus.
We have not generated any operating revenues, have not operated profitably and
expect to operate at a loss for the foreseeable future
As of September, 1999, we had generated no operating revenues since
inception and had an accumulated deficit of approximately $409,238. We expect to
continue to incur significant losses for the foreseeable future. Although our
revenues are expected to grow rapidly, for the foreseeable future, our expenses
are expected to grow even faster and we expect to increase our spending
significantly. Accordingly, we will need to generate significant revenues to
achieve profitability. We may not be able to do so.
We may not be able to generate substantial advertising revenues as called for in
our business plan
Our business plan is dependent on the anticipated expansion of online
advertising in Latin America and the growth of our revenues is dependent on
establishing and growing revenues generated by advertising. If the market for
online advertising in Latin America does not develop to the extent anticipated
or develops at a slower pace than anticipated or if we are unable to secure and
maintain online advertising relationships, our revenues may be insufficient to
operate profitably.
Online advertising is an unproven business and our ability to generate and
maintain significant advertising revenues will depend, among other things, on:
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* advertisers' acceptance of the Internet as an effective and
sustainable advertising medium;
* the development of a large base of users of our portal network
possessing demographic
characteristics attractive to advertisers;
* our ability to contract with a diverse group of advertising
affiliates; and
* the effectiveness of our advertising delivery, tracking and
reporting system.
We have developed an "infomercial" advertising model. We have not, however,
as yet, entered into any substantial advertising arrangements pursuant to which
advertisements will appear on our network. We anticipate that most advertising
affiliates will contract for our services under agreements cancelable upon a
specified notice period. Our advertising affiliates will measure satisfaction by
acceptable revenue levels, the number of times users view an advertisement,
general reputation of our network and loyalty to our network among users and
timely and accurate reporting. There can be no assurance that:
* we will be able to attract a sufficient number of advertisers to allow
us to operate profitably;
* our advertising affiliates will remain associated with us; or
* our advertising affiliates will maintain consistent or increasing
traffic levels over time.
The loss of our advertising affiliates or a reduction in traffic on such
Web sites or on our portal may cause advertisers to withdraw from our network,
which, in turn, could reduce our future advertising revenues.
Some of our advertising revenues may be non-cash revenues which do not provide
funds to pay operating expenses or expansion costs.
We may enter into reciprocal advertising arrangements under which we
exchange advertising on our network for advertising space on traditional
advertising mediums, such as radio, television, newspapers and magazines.
Reciprocal advertising arrangements do not generate any cash revenues and,
therefore, do not provide funds to pay operating expenses or expansion costs.
Such reciprocal advertising arrangements may represent a substantial portion of
our revenues, particularly in the early months and years of operation of our
network.
We will rely on content provided by third parties to attract users and
advertisers
Pursuant to our business plan, we expect to rely on a number of third
parties to create and supply content in order to make our network more
attractive to users and advertisers. The loss of content, or receipt of content
which is not attractive to users or is readily available at other sites, could
result in reduced traffic volume to our network and reduced revenues. To remain
competitive, we must continue to enhance and improve our content. We have
entered into a limited number of arrangements with content providers and must
enter into additional arrangements to provide for the quality and volume of
content necessary to make our network an attractive site. We anticipate that
most of these arrangements will not be exclusive and will be short term in
nature or cancelable on short notice. There can be no assurance that we will be
successful in establishing and maintaining relationships with content providers.
We will rely on various strategic relationships with electronic commerce
merchants, technology providers and others
Our business is expected to depend on establishing relationships with
leading electronic commerce merchants, and technology and infrastructure
providers. If we are unable to establish such relationship or if the parties
with which we have these relationships do not adequately perform their
obligations, reduce their activities with us, choose to compete with us or
provide their services to a competitor, we may have more difficulty attracting
and maintaining visitors to our network and our revenues and profitability may
decline. We have not, as yet, entered into any substantial relationships with
electronic commerce merchants or technology or infrastructure providers. Because
most of our agreements with these third parties are not expected to be
exclusive, our competitors may seek to use the same partners as we do and
attempt to adversely impact our relationships with our partners. We might not be
able to maintain these relationships or replace them on financially attractive
terms. Also, we intend to actively seek additional relationships in the future.
Our efforts in this regard may not be successful.
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We will be required to continually enhance and invest in our network to attract
users and advertisers
In order to attract and retain users and advertisers to our network, we
must continually improve the responsiveness, functionality and features of our
network and develop other products and services that are attractive to users and
advertisers. If we are not successful in developing or introducing features,
functions, products and services that visitors and advertisers find attractive
in a timely manner we will likely experience reduced visitor traffic, revenues
and profitability.
Unexpected systems interruptions and capacity constraints could reduce user
traffic, reducing revenues and impeding development of our business.
Any systems failure or inadequacy that causes interruptions in the
availability of our services, or increases the response time of our services, as
a result of increased traffic or otherwise, could reduce user satisfaction,
future traffic and our attractiveness to users and advertisers resulting in
reduced revenues. In addition, as the amount of Web pages and traffic increases,
there can be no assurance that we will be able to scale our systems
proportionately. There also can be no assurance that our ad serving technology
can continue to properly track the number of impressions on our advertising
affiliates if traffic increases substantially. We are also dependent upon Web
browsers, ISPs, and other Web site operators in Latin America and elsewhere,
which may experience significant system failures and electrical outages and our
users may experience difficulties due to system failures unrelated to our
systems and services.
We have limited backup systems and redundancy and we may experience system
failures and electrical outages from time to time which disrupt our operations.
We do not presently have a disaster recovery plan in the event of damage from
fire, hurricanes, floods, power loss, telecommunications failures, break-ins and
similar events. If any of the foregoing occurs, we may experience a complete
system shut-down. If we experience delays and interruptions, or if a computer
virus affecting our system is highly publicized, visitor traffic may decrease
and our brand could be adversely affected. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss or
litigation and possible liability. Because our revenues depend on the number of
individuals who use our network, our business may suffer if our efforts to
maintain our system are unsuccessful. Further, any significant equipment,
computer virus, or related systems problem, could require us to incur
significant unanticipated expenses to remedy these problems and could divert
management's time and attention. Although we carry general liability insurance,
our insurance may not cover any claims by dissatisfied providers or subscribers
or may not be adequate to indemnify us for any liability that may be imposed in
the event that a claim were brought against us. To improve performance and to
prevent disruption of our services, we may have to make substantial investments
to deploy additional servers or one or more copies of our Web sites to mirror
our online resources.
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Development of our business and revenue growth could be impeded if
LatinFusion.com is not successful in establishing brand awareness for the
network
Maintaining the LatinFusion.com brand is critical to our ability to expand
our user base and our revenues. If we fail to promote our brand successfully or
if visitors to our network or advertisers do not perceive our services to be of
high quality, the value of the LatinFusion.com brand could be diminished
resulting in reduced user traffic and revenues. We believe that the importance
of brand recognition will increase as the number of Internet sites in Latin
America grows. In order to attract and retain Internet users, advertisers and
electronic commerce partners, we intend to increase substantially our
expenditures for creating and maintaining brand loyalty. Our success in
promoting and enhancing the LatinFusion.com brand will also depend on our
success in providing high quality content, features and functionality.
We may not be able to obtain sufficient funds to implement our business plan and
grow our business
Implementation of our business plan and growth of our business will require
substantial additional funding. If we are unable to raise additional capital,
our ability to implement our business plan, to grow our business and to operate
profitably could be impeded. Because we expect to generate losses for the
foreseeable future, we do not expect that income from our operations will be
sufficient to meet these needs. Therefore, we will likely have substantial
future capital requirements after the merger. Obtaining additional financing
will be subject to a number of factors, including market conditions, our
operating performance, and investor sentiment. These factors may make the
timing, amount, terms and conditions of additional financing unattractive for
us.
Rapid growth in operations could strain our managerial, operational and
financial resources, resulting in reduced revenues and profitability
The planned growth of our network and operations may place a significant
strain on our managerial, operational and financial resources. Our failure to
expand and integrate these areas in an efficient manner could cause our expenses
to grow and our revenues to decline or grow more slowly than expected. To
accommodate this planned growth, we must implement continually new or upgraded
operating and financial systems, procedures and controls throughout many
different locations. In addition, our future success will also depend on our
ability to expand, train and manage our workforce, in particular our sales and
marketing organization, both domestically and internationally. We will also have
to maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial personnel. We may not succeed with these efforts.
The loss of key personnel could impede implementation of our business plan and
reduce profitability
Our future success will depend, in substantial part, on the continued
service of our senior management, including Mr. Hernando Bahamon, our Chief
Executive Officer, and key technical and sales personnel. The loss of the
services of one or more of our key personnel could impede implementation of our
business plan and reduce profitability. We have applied for a key person life
insurance policy in the amount of $5 million on the life of Mr. Bahamon, but
have not, as yet, obtained such policy. Our future success will also depend on
our continuing ability to attract, retain and motivate highly qualified
technical, sales and marketing, customer support, financial and accounting, and
managerial personnel. Competition for this personnel, in particular information
technology professionals, is intense, and we cannot assure you that we will be
able to retain our key personnel or that we will be able to attract, assimilate
or retain other highly qualified personnel in the future.
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Latin American Internet Risks
The Latin American Internet industry is a developing market and has not proven
as an effective commercial medium
The market for Internet services in Latin America is in an early stage of
development. If Internet usage in Latin America does not continue to grow or
grows more slowly than we anticipate, the development of our business may be
impeded and our revenues may be insufficient to operate profitably. Since the
Internet is an unproven medium for advertising and other commercial services,
our future operating results will depend substantially upon the increased use of
the Internet for information, publication, distribution and commerce and the
emergence of the Internet as an effective advertising medium in Latin America.
Critical issues concerning the commercial use of the Internet in Latin
America such as security, reliability, cost, ease of deployment, administration
and quality of service may affect the adoption of the Internet to solve business
needs. The most advanced security measures for electronic sales transactions
have been developed to accommodate credit card sales. The use of credit cards is
not, however, a common practice in Latin America. While debit cards are more
common than credit cards in Latin America and a security system has been
developed for use with debit cards, consumers will have to be confident that
adequate security measures protect electronic sales transactions in the Latin
American market before electronic commerce can attain wide acceptance. Further,
cost of access, poor reliability and poor service may prevent many potential
Latin Americans from using the Internet.
Our ability to grow users of our network depends on the establishment of an
adequate telecommunications infrastructure in Latin America
The telecommunications infrastructure in many parts of Latin America is not
as well-developed as in the United States or Europe. If improvements to the
Latin American telecommunications infrastructure do not occur or if access to
the Internet in Latin America does not continue to grow or grows more slowly
than we anticipate, the development of our business may be impeded and our
revenues may be insufficient to operate profitably. Access to the Internet
requires a relatively advanced telecommunications infrastructure. The quality
and continued development of the telecommunications infrastructure in Latin
America will have a substantial impact on our ability to deliver our services
and on the market acceptance of the Internet in Latin America in general. If
further improvements to the Latin American telecommunications infrastructure are
not made, the Internet will not gain broad market acceptance in Latin America.
Social, political and economic risks associated with doing business in Latin
America may impede the development of our business
Social, political and economic conditions in Latin America are volatile and
may cause our operations to fluctuate. This volatility could make it difficult
for us to implement and grow our business and sustain our expected growth in
revenues and earnings, which could have an adverse effect on our stock price.
Historically, volatility has been caused by significant governmental influence
over many aspects of local economies, political instability, unexpected changes
in regulatory requirements, social unrest, slow or negative growth, imposition
of trade barriers, and wage and price controls.
We have no control over these matters. Volatility resulting from these
matters may decrease Internet availability, create uncertainty regarding our
operating climate and adversely affect our customers' advertising budgets, all
of which may impede the development of our business and result in reduced
revenues and profitability.
Currency exchange rate fluctuation may impede development of our business and
result in exchange rate losses
Currency fluctuations and poor general economic conditions in Latin
American countries may cause our customers to reduce their advertising spending,
which could impede development of our business and could cause our revenue to
decline unexpectedly.Many countries in Latin America, including major Latin
American markets such as Brazil and Argentina, have experienced significant
economic downturns and currency rate volatility. Currency fluctuations, as well
as high interest rates, inflation and high unemployment, have materially and
adversely affected the economies of these countries.
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In addition to potentially adversely impacting our revenues, currency
fluctuations may give rise to exchange rate losses. We may bill customers in
Latin America in local currencies. Our accounts receivable from these customers
will decline in value if the local currencies depreciate relative to the U.S.
dollar. Although we may enter into hedging transactions in the future in an
effort to reduce our exposure to exchange rate fluctuations, we may not be able
to do so successfully. In addition, our currency exchange losses may be
magnified if we become subject to exchange control regulations restricting our
ability to convert local currencies into U.S. dollars.
Intense competition in the Latin American Internet industry could cause our
revenues to be insufficient to operate profitably
Intense competition in the Latin American Internet industry could result in
lower advertising rates, price reductions and lower profit margins, loss of
visitors, reduced page views, or loss of market share. Any one of these could
result in reduced revenues and a lack of profitably.
The Latin American Internet market is characterized by an increasing number
of entrants because of low barriers to entry into the market. In addition, the
Internet industry is relatively new and subject to continuing definition and as
a result, our competitors may better position themselves to compete in this
market as it matures. Many of our existing competitors, as well as a number of
potential new competitors, have longer operating histories in the Internet
market, greater name recognition, larger customer bases and databases and
significantly greater financial, technical and marketing resources than do we.
Any of our present or future competitors may provide products and services that
provide significant performance, price, creative or other advantages over those
offered by us. We can provide no assurance that we will be able to compete
successfully against our current or future competitors.
Regulatory and Legal Risks
Regulation of the Internet industry in Latin America and other markets may
impede implementation of our business
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. New legislation and regulation
could increase our cost of doing business, dampen the growth in the use of the
Internet generally, and our network in particular, and decrease the acceptance
of the Internet as a communications and commercial medium, which could impede
implementation of our business plan resulting in reduced revenues and a lack of
profitability. It may take years to determine whether and how existing laws,
including those governing intellectual property, privacy, libel and taxation,
apply to the Internet generally and electronic publishing, advertising and
commerce in particular. In addition to new laws and regulations being adopted,
existing laws may be applied to the Internet. New and existing laws may cover
issues which include: sales and other taxes, user privacy, pricing controls,
characteristics and quality of products and services, consumer protection,
cross-border commerce, libel and defamation, copyright, trademark and patent
infringement, pornography, and other claims based on the nature and content of
Internet materials.
In addition, because the growing popularity and use of the Internet has
burdened the existing telecommunications infrastructure and many areas with high
Internet usage have begun to experience interruptions in phone service, some
local telephone carriers have petitioned governmental agencies to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on Internet service
providers and online service providers. If any of these petitions or the relief
that they seek is granted, the costs of communicating on the Internet could
increase substantially, potentially adversely affecting the growth in the use of
the Internet.
Further, due to the global nature of the Internet, it is possible that,
although transmissions relating to our services originate in one state or
country, governments of other states or countries might attempt to regulate our
services or levy sales or other taxes on our activities. We cannot assure you
that violations of local or other laws will not be alleged or charged by local,
state, federal or foreign governments, that we might not unintentionally violate
these laws or that these laws will not be modified, or new laws enacted, in the
future. Any of these developments could impede development of our business
resulting in reduced revenues and a lack of profitability.
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Because we expect to have employees, property and business operations in
the United States and throughout Latin America, we will be subject to the laws
and the court systems of many jurisdictions. We may become subject to claims
based on foreign jurisdictions for violations of their laws. In addition, these
laws may be changed or new laws may be enacted in the future. International
litigation is often expensive, time consuming and distracting. Accordingly, any
of the foregoing could result in increased expenses and reduced profitability.
Failure to adequately protect and secure intellectual property rights may
result in reductions in revenues or unexpected expenses.
Protection of our rights regarding intellectual property is believed to be
critical to our success. Unauthorized use of our intellectual property by third
parties may adversely affect our reputation resulting in reduced revenues. We
intend to rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
Further, we may from time to time license technology from third parties or
develop intellectual property internally for use on our network. We cannot be
certain that our products do not or will not infringe valid patents, copyrights
or other intellectual property rights held by third parties. We may be subject
to legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against us may result
in substantial monetary liability or may materially disrupt the conduct of our
business.
We may be held liable for information retrieved from our network
Because our services can be used to download and distribute information to
others, there is a risk that claims may be made against us for defamation,
negligence, copyright or trademark infringement or other claims based on the
nature and content of such material. The laws in the United States and in Latin
American countries relating to the liability of companies which provide online
services, like ours, for activities of their visitors are currently unsettled.
We could be subject to claims based on content retrieved from our network and
incur significant costs in their defense. In addition, we could be exposed to
liability for the selection of listings that may be accessible through our
network or through content and materials that our visitors may post in
classifieds, message boards, chat rooms or other interactive services. It is
also possible that if any information provided through our services contains
errors, third parties could make claims against us for losses incurred in
reliance on the information. We intend to offer Web-based e-mail services, which
expose us to potential liabilities or claims resulting from unsolicited e-mail,
lost or misdirected messages, illegal or fraudulent use of e-mail, or
interruptions or delays in e-mail service.
We may be subject to claims based on products and services sold on our network
We intend to enter into arrangements to offer third-party products and
services on our network which may subject us to additional claims including
product liability or personal injury from the products and services, even if we
do not ourselves provide the products or services. These claims may require us
to incur significant expenses in their defense or satisfaction. While our
agreements with these parties are expected to provide that we will be
indemnified against such liabilities, such indemnification may not be adequate.
Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could subject us
to payment of amounts in excess of our available resources or could result in
the imposition of criminal penalties. In addition, the increased attention
focused on liability issues as a result of these lawsuits and legislative
proposals could impact the overall growth of Internet use.
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Risks Related to IDM
We have a history of substantial operating losses and may continue to experience
losses
We have experienced significant operating losses during the past four years
and may continue to experience losses in the future. We had net losses
attributable to common stock of $22.4 million, $9.9 million, $9.1 million and
$3.9 million during the years ended December 31, 1998, 1997, 1996 and 1995,
respectively and a net loss of $6.5 million during the nine months ended
September 30, 1999. Until such time as we are able to begin one or more large
projects on which delays in commencement have been experienced, or until such
time as other projects are begun, if ever, we will continue to experience
losses.
Intense competition may limit our ability to secure projects and results in
lower margins
Competition in the environmental services industry is intense. As a result
of such competition, operating margins may be reduced and our ability to secure
profitable contracts may be limited. The industry is dominated by large
architectural engineering firms such as Bechtel, Fluor, Westinghouse, Foster
Wheeler and ICF Kaiser, among others. Additionally, many smaller engineering
firms, construction firms, consulting firms and other specialty firms have
entered the environmental services industry in recent years and additional firms
can be expected to enter into the industry. Many of the firms with which we
compete in the environmental services industry have significantly greater
financial resources and more established market positions than do we.
Various segments of the environmental industry are mature and are not growing
With the entry of increasing competition, the market for certain labor
intensive low technology services, such as asbestos abatement, dismantling and
demolition, has become saturated resulting in lower margins in those segments.
As a result of such maturation and competitive pressures many participants in
the environmental services industry have incurred losses or significant declines
in profitability in recent years. The maturation of those markets and our
determination to avoid those markets has reduced the potential market for our
environmental services and potential revenues from such services. Further, there
can be no assurance that other segments of the environmental services market not
previously effected by competition and lower margins will not be adversely
effected in the future.
We may incur writedowns and other losses if we are unable to integrate recent
acquisitions
We have undertaken various strategic technology acquisitions and alliances
in recent years in order to improve our competitive position and increase our
potential revenues. In the event we are unable to successfully integrate our
technology acquisitions/alliances with our existing operations or we are unable
or unwilling to meet the funding requirements necessary to fully commercialize
such technologies, it is possible that we could loss some or all of our
investment in such technologies. There can be no assurance that we will be
successful in integrating such new technologies with our existing service
offerings. Further, it is possible that certain state-of-the-art technologies,
including technologies which have been or may in the future be acquired by us,
may not yet be commercially viable or may require ongoing funding beyond our
capabilities before those technologies can be successfully deployed on a
commercial basis.
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We may incure writedowns and other losses if we are unable to successfully enter
into the power production market
We have devoted substantial resources to our entry into the power
production market and expect to devote substantial additional resources to such
efforts in the future. If we are unable to translate our efforts and investments
into operating power facilities, we may incur substantial writedowns of our
investments and other losses associated with such efforts. Our ability to profit
from efforts in this regard is contingent upon our ability to successfully
negotiate agreements with governmental, industrial and other entities whereby
those entities agree to purchase all or a substantial portion of the power
produced by those facilities, our ability to finance and construct power
production facilities on terms deemed acceptable and our ability to purchase
feed stocks and operate facilities at sufficiently low cost to generate
operating profits and to recover the cost of constructing such facilities. We
have no experience in constructing or operating power production facilities.
There can be no assurance that we will be successful in consummating
arrangements to construct, operate and sell power from such facilities. Even if
we are successful in consummating such transactions, there can be no assurance
that the facilities can or will be operated profitably or, given the nature of
the anticipated purchasers of such production, that the foreign entities which
have contracted to purchase such production will have the financial capability
to purchase the power committed to be purchased.
Despite our substantial investments to enter into the power production
market, we have been unable to commence any substantial power production
operations, other than of a development nature, and have been unable to secure
adequate power purchase arrangements or financing to begin construction of any
power plants to date.
Additionally, even if we are successful in developing and financing power
projects, a variety of independent power producers and private and government
owned entities may provide power in some of the markets in which we expect to
operate. 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.
Accordingly, there can be no assurance that we will be successful in our
efforts to enter that market, that we can operate on a profitable basis in the
markets which we may enter or that any profits which may be generated will be
sufficient to recover the cost of entering the power production market.
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Our ability to perform certain environmental services is dependent on our
ability to secure bonding
In order to bid on and successfully secure contracts to perform
environmental services of the nature offered, we may, depending upon the bid
specifications, be required to provide surety bonds for each respective project.
There can be no assurance that we will have adequate bonding capacity to bid on
all of the projects which we would otherwise bid upon were we to have such
bonding capacity or that we will in fact be successful in obtaining additional
jobs on which we may bid. The number and size of contracts which we can perform
is directly dependent upon our ability to obtain bonding which, in turn, is
dependent upon our net worth, liquid working capital, and the nature and
projected profitability of projects undertaken, among other factors. We have,
from time to time, been unable to secure additional and larger contracts as a
result of such bonding requirements and may incur similar difficulties in the
future.
We are subject to potential liabilities and costs in connection with compliance
with environmental regulations
Environmental regulations, at the federal, state and local levels, impose
stringent guidelines on companies which generate and handle hazardous materials
as well as other companies involved in various aspects of the environmental
services industry. Any future increases or changes in regulation may result in
our incurring additional costs for equipment, retraining, development of new
remediation or abatement plans, handling of hazardous materials and other costs.
We have been named in complaints, and may be named in future complaints, as
violating various regulations governing the removal of asbestos. We have settled
certain complaints in the past by agreeing to pay civil fines or penalties
without admitting liability. There can be no assurance, however, that any
complaints which may arise in the future can be settled on a favorable basis. In
any event, because of the nature of our operations and the industry in which we
operate, the potential for liability and the extent of such potential liability
is very substantial. Any such liability which is determined to exist could
result in unexpected expenses, operating losses and demands in excess of our
resources.
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We may be exposed to damages or claims not covered by insurance or exceeding the
limits of our insurance coverage
Our environmental impairment insurance policy does not cover any liability
arising from radiological operations other than low level radioactive soil
excavation and facility cleaning. If, in the absence of such insurance, were we
to incur liability for environmental impairment in connection with excluded
radiological services, such liability could result in unexpected expenses and
demands in excess of our resources. Further, as the cost of cleaning or
correcting environmental hazards can be extremely high, even if we are
determined to be liable for costs which are covered by insurance, there is no
assurance that such coverage will be adequate to pay the entire cost thereof
and, therefor, we may incur losses in excess of our insurance coverage.
Our operations are frequently dependent upon a small number of major customers
and projects
A significant portion of our revenues in recent years have come from, and a
significant portion of our resources have been devoted to, one or more large
clients and projects. We are subject to large decreases in revenues following
the completion of large projects. In order for us to replace the revenues
attributable to large projects, we must secure one or more large projects or a
large number of smaller projects upon completion of such projects. There is no
assurance that we can adequately replace such projects with other projects which
will produce as much revenue. Further, there is no assurance that we will not
continue to be dependent upon a small number of major customers for a
significant portion of our revenues and earnings.
We are dependent upon the efforts of key personnel
Our operations are dependent upon the continued efforts of senior
management. Should any of the members of our senior management be unable or
unwilling to continue in their present roles or should such persons determine to
enter into competition with us, our ability to bid on or perform certain
projects could be limited resulting in reduced revenues and operating profits.
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We are dependent on temporary labor
The location and other factors effecting jobs performed away from the
immediate vicinity of our headquarters result in our regularly hiring temporary
workers on site. We may experience difficulties in satisfactorily performing
jobs and, in some cases, may be exposed to certain liabilities as a result of
the acts or performance of such temporary workers. There is no assurance that
all such temporary workers will perform at levels acceptable to us and our
customers. Additionally, in some locations, we may be required to hire unionized
temporary labor. The hiring of such unionized workers may give rise to various
other considerations affecting the performance of jobs, including possible work
stoppages and varying wage and benefit demands, among others.
Our substantial working capital and financing requirements and lack of financial
resources may cause us to have to sell assets, curtail operations or secure
third party financing
Pending the receipt of payments for services rendered, we must typically
fund substantial project costs, including significant labor and bonding costs.
If we have inadequate working capital to fund such costs and support ongoing
operations, we must sell assets, curtail operations or secure third party
financing.
As a result of such working capital shortages, we were required to raise
additional capital through the sale of equity securities on multiple occassions
since 1995. There is no assurance that we will not require additional financing
in the future. While we have agreed with Fusion Networks that one-half of all
proceeds received from the exercise of outstanding options and warrants will be
contributed to our capital to support operations and we intend to seek any bank
or other financing which may be required in the future, there is no commitment
on the part of any option or warrant holders to exercise those options or
warrants and no source of potential financing has been identified and there is
no assurance that any such financing will be available on terms acceptable to
us, or at all, if needed.
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We have been subject to, and may continue to be subject to, legal and
administrative proceedings which may give rise to possible liability
We are periodically subject to lawsuits and administrative proceedings
arising in the ordinary course of our business. We may incur substantial
unexpected expenses as a result of such legal and administrative
proceedings.Included in such proceedings are periodic administrative proceedings
initiated by various environmental regulatory agencies.
We have experienced recurring difficulty collecting amounts owed pursuant to
changes in the scope of services on projects
We have periodically been required to expand the scope of services on
projects due to undisclosed circumstances, delays or disruptions caused by
clients or other contractors and change orders requested by customers. Should we
be unable to collect reasonable compensation for additional services or should
we experience extended delays in paying such amounts, we may experience
substantial losses from projects or substantial negative cash flow from projects
until such time as payment is received. In such situations, we have routinely
sought additional compensation for the additional services rendered as a result
of such undisclosed circumstances, delays or disruptions and change orders. We
have, on a number of occasions, had disputes with our clients as to the amount
of additional compensation owed and delays in the payment of such amounts.
We have been a party to, and are a party to, transactions involving possible
conflicts of interest
We have been controlled, and may continue to be controlled, by Joel
Freedman and Frank Falco, our principal officers, and have periodically engaged
in transactions with Messrs. Freedman and Falco and entities controlled by
Messrs. Freedman and Falco.
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Any current or future transactions with such affiliates may involve possible
conflicts of interest.
We have amended and restated our financial statements
As a result of cost overruns and unapproved change orders on a series of
projects during 1996 and the first quarter of 1997, we implemented certain
changes in the manner in which we account for job costs and revenues. In
conjunction with those accounting changes, we restated our financial statements
and amended our reports on Forms 10-Q for the quarters ended March 31, 1996,
June 30, 1996, September 30, 1996, March 31, 1997, June 30, 1997 and September
30, 1997 and on Form 10-K for the year ended December 31, 1996.
Risks Related to the Merger
Fusion Networks shareholders will receive a fixed number of shares of FNHI
common stock despite changes in market value of IDM common stock
Upon the merger's completion, each share of Fusion Networks common stock
will be exchanged for one share of FNHI common stock. Accordingly, the specific
dollar value of FNHI common stock that Fusion Networks shareholders will receive
upon the merger's completion will depend on the market value of FNHI common
stock when the merger is completed and may decrease from the date you submit
your proxy. There will be no adjustment for changes in the market price of IDM
common stock. In addition, neither Fusion Networks nor IDM may terminate the
merger agreement or "walk away" from the merger or re-solicit the vote of its
shareholders solely because of changes in the market price of IDM common stock.
The share price of IDM common stock, and following the merger FNHI common stock,
is by nature subject to the general price fluctuations in the market for
publicly traded equity securities and has experienced significant volatility. We
urge you to obtain recent market quotations for IDM common stock. IDM cannot
predict or give any assurances as to the market price of IDM common stock or
FNHI common stock at any time before or after the completion of the merger.
The benefits of diversification can only be achieved if both IDM and Fusion
Networks can continue to carry on their operations as separate businesses, IDM
can improve its operating results and secure necessary capital to complete
various power projects it is pursuing and Fusion Networks can successfully
implement its business plan, each of which is subject to substantial risks
discussed elsewhere herein.
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The merger could adversely affect combined financial results
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to stockholders resulting from the merger, the
combined financial results of IDM and Fusion Networks, including earnings per
share, could be adversely affected. Specifically, IDM and Fusion Networks expect
to incur direct transaction costs of approximately $250,000 in connection with
the merger.
The market price of FNHI common stock may decline as a result of the merger
The market price of IDM common stock and, following the merger, FNHI common
stock may decline as a result of the merger if:
* FNHI does not achieve the perceived benefits of the merger as rapidly
or to the extent anticipated by financial or industry analysts; or
* the effect of the merger on FNHI's financial results is not consistent
with the expectations of financial or industry analysts.
IDM's officers and directors have conflicts of interest that may influence them
to support or approve the merger
The directors and officers of IDM participate in arrangements that provide
them with interests in the merger that are different from, or in addition to,
yours.
The directors and officers of IDM could be more likely to vote to approve
the merger agreement than if they did not hold these interests. IDM shareholders
should consider whether these interests may have influenced these directors and
officers to support or recommend the merger.
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The fairness opinion obtained by IDM will not reflect changes in the relative
values of the companies since the merger agreement was signed
IDM does not intend to obtain an updated fairness opinion of Chartered
Capital Advisers. Therefore, the opinion of Chartered Capital Advisers does not
address the fairness of the merger consideration at the time the merger will be
completed. Changes in the operations and prospects of IDM or Fusion Networks,
general market and economic conditions and other factors which are beyond the
control of IDM or Fusion Networks, on which the opinion of Chartered Capital
Advisers is based, may have altered the relative values of the companies.
The rights of FNHI shareholders may be less than those of IDM and Fusion
Networks shareholders
Upon completion of the holding company reorganization and merger,
shareholders of IDM and Fusion Networks will become stockholders of FNHI and
their rights will be governed by Delaware law applicable to corporations formed
under the laws of that state and by FNHI's charter and bylaws. The rights of the
shareholders of IDM and Fusion Networks may differ materially from the rights of
stockholders of FNHI and the rights of the former IDM and Fusion Networks
shareholders in FNHI may be less favorable than their former rights as
shareholders of IDM and Fusion Networks, respectively.
The principal officers and stockholders of Fusion Networks may significantly
influence matters to be voted on by stockholders following the merger
The executive officers and 5% stockholders of Fusion Networks currently
beneficially own approximately 76.8% of the outstanding shares of common stock
of Fusion Networks, and after the merger will beneficially own approximately
69.7% of the outstanding shares of our common stock. Accordingly, they will
have significant influence in determining the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including the election of directors, mergers, consolidations and the sale of all
or substantially all of our assets, and also the power to prevent or cause a
change in control. The interests of these stockholders may differ from the
interests of the other stockholders.
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You may experience substantial dilution as a result of our ability to issue
substantial amounts of additional shares without shareholder approval
Following the merger, FNHI will have an aggregate of approximately
50,943,000 shares of common stock authorized but unissued and not reserved for
specific purposes and an additional 12,167,000 shares of common stock unissued
but reserved for issuance pursuant to outstanding warrants and options. Although
there are no other present plans, agreements, commitments or undertakings with
respect to the issuance of additional shares, or securities convertible into any
such shares, any shares issued would further dilute the percentage ownership
held by the public shareholders. All of such shares may be issued without any
action or approval by shareholders.
In addition to the above referenced shares of common stock which may be
issued without shareholder approval, following the merger, FNHI will have
1,000,000 shares of authorized preferred stock, of which no shares are expected
to be outstanding. Prior to the distributions of any amounts to the holders of
common stock, whether as dividends or on liquidation, the holders of outstanding
preferred stock must have received their cumulative dividend or liquidation
preference, as appropriate. While we have no present plans to issue any shares
of preferred stock, the board of directors will have the authority, without
shareholder approval, to create and issue one or more series of such preferred
stock and to determine the voting, dividend and other rights of holders of such
preferred stock. The issuance of any of such series of preferred stock could
have an adverse effect on the holders of common stock.
The ability of the board of directors to fix the terms of and issue shares
of preferred stock without shareholder approval, and other anti-takeover
provisions in our certificate of incorporation and bylaws and available under
Delaware law, could (1) result in FNHI being less attractive to a potential
acquiror and (2) result in shareholders receiving less for their shares than
otherwise might be available in the event of a take over attempt.
The market price of our shares may experience price and volume fluctuations
Broad market fluctuations may adversely affect the market price of our
common stock. The stock market has, from time to time, experienced extreme price
and volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile, including fluctuations that are often
unrelated to the operating performance of the affected companies.
The market price of our common stock could be subject to significant
fluctuations due to a variety of factors, including:
* public announcements concerning us or our competitors, or the Internet
industry;
* fluctuations in operating results;
* introductions of new products or services by us or our competitors;
* changes in analysts' earnings estimates; and
* announcements of technological innovations.
In the past, companies that have experienced volatility in the market price
of their stock, including IDM, have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's attention
and resources and have a material adverse effect on our business, results of
operation and financial condition.
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Future sales of shares of our common stock may negatively affect our stock price
If our stockholders sell substantial amounts of our common stock, including
shares issuable upon the exercise of outstanding options and warrants in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and price that we deem appropriate. Persons who may be deemed to be
affiliates of either IDM or Fusion Networks include individuals or entities that
control, are controlled by, or are under common control of either IDM or Fusion
Networks and may include some of the officers, directors, or principal
shareholders of IDM or Fusion Networks. Affiliates may not sell their shares of
common stock acquired in connection with the merger except pursuant to:
* an effective registration statement under the Securities Act covering
the resale of those shares;
* an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
* another applicable exemption under the Securities Act.
We do not expect to pay dividends for the foreseeable future
We have not declared or paid, and do not anticipate declaring or paying in
the foreseeable future, any cash dividends on our Common Stock. Our ability to
pay dividends is dependent upon, among other things, our future earnings,
operating and financial condition, our capital requirements, general business
conditions and other pertinent factors, and is subject to the discretion of our
board of directors. Further, as noted above, no distributions may be made with
respect to the common stock unless all cumulative dividends with respect to
outstanding preferred stock, if any, have been paid. Accordingly, there is no
assurance that any dividends will ever be paid on our common stock.
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COMPARATIVE PER SHARE DATA
The following table sets forth unaudited data concerning the net loss,
dividends and book value per share for IDM and Fusion Networks on a historical
basis and on a pro forma basis after giving effect to the merger:
IDM Common Stock: Year ended Nine Months ended
December 31, 1998 September 30, 1999
Net loss per share:
Historical.................... $(13.31) $(2.07)
Pro forma consolidated........ $ (0.75) $(0.22)
Book value per share at end of period:
Historical...................................... $0.67
Pro forma consolidated.......................... $1.15
Fusion Networks Common Stock: Period from July 1, 1999 (Inception)
to September 30, 1999
Net loss per share:
Historical................................ $(0.01)
Pro forma consolidated.................... $(0.22)
Book value per share at end of period:
Historical................................ $0.11
Pro forma consolidated.................... $1.15
Shares used in computing the net loss per share data have been derived from
each company's historical weighted average shares outstanding for the historical
data and adjusted to give effect to the ratio of the shares issuable to each
company's stockholders as of the merger for the pro forma consolidated data.
Book value data was derived from each company's historical book value at the end
of the period and applied to the ratio of the shares issuable to each company's
stockholders at the merger date for the historical data and adjusted to reflect
the effect of the merger and the completion of the private placement offering by
Fusion Networks for the pro forma consolidated data.
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MARKET PRICE INFORMATION
IDM Market Price Data
IDM's common stock has traded on the Nasdaq SmallCap Market under the
symbol "IDMC" since May 11, 1999. Prior to that date IDM's common stock traded
on the Nasdaq National Market under the same symbol. The following table sets
forth the high and low sales price as reported by the Nasdaq SmallCap Market and
the Nasdaq National Market for the IDM common stock for the periods indicated.
All prices are adjusted to reflect a 1- for-10 reverse stock split effective
April 16, 1999.
High Low
------ ------
Calendar Year 1999
Fourth Quarter................ $ 7.63 $ 4.81
Third Quarter................. 6.38 1.00
Second Quarter................ 3.13 1.00
First Quarter................. 5.63 2.50
Calendar Year 1998
Fourth Quarter................ 9.22 3.44
Third Quarter................. 27.19 5.00
Second Quarter................ 40.00 25.63
First Quarter................. 75.63 36.25
Fusion Networks Market Price Data
There is no trading market in the common stock of Fusion Networks.
At the date of the merger agreement, Fusion Networks had 8 shareholders. As
of January 15, 2000, Fusion Networks had 75 shareholders.
Recent Closing Prices
On August 18, 1999, the last trading day before announcement of the signing
of the merger agreement, the closing price per share of IDM common stock on the
Nasdaq SmallCap Market was $4.719. On August 11, 1999, five business days before
announcement of the signing of the merger agreement, the closing price per share
of IDM common stock on the Nasdaq SmallCap Market was $3.438. On February 24,
2000, the latest practicable trading day before the printing of this joint proxy
statement/prospectus, the closing prices per share of IDM common stock on the
Nasdaq SmallCap Market was $18.06.
Because the market price of IDM common stock, and following the merger the
FNHI common stock is subject to fluctuation, the market value of the shares of
FNHI common stock that holders of Fusion Networks common stock will receive in
the merger may increase or decrease prior to and following the merger. We urge
shareholders to obtain current market quotations for IDM common stock. No
assurance can be given as to the future prices or markets for IDM common stock
or FNHI common stock.
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THE IDM SPECIAL MEETING
General
We are furnishing this joint proxy statement/prospectus to holders of IDM
Environmental Corp. common stock in connection with the solicitation of proxies
by the IDM board of directors for use at the special meeting of stockholders of
IDM to be held on Tuesday, March 28, 2000, and any adjournment or postponement
thereof.
This joint proxy statement/prospectus is first being furnished to IDM
stockholders on or about February 29, 2000.
Date, Time and Place
The special meeting will be held on Tuesday, March 28, 2000 at 10:00 a.m.,
local time, at the Brunswick Hilton, 3 Tower Center Drive, East Brunswick, New
Jersey 08816.
Matters to be Considered at the Special Meeting
At the special meeting and any adjournment or postponement of the special
meeting, IDM stockholders will be asked:
(1) to consider and vote upon the approval of the merger of IDM with a
wholly-owned subsidiary of FNHI for the purpose of creating a holding company
structure in which IDM is a wholly-owned subsidiary of FNHI;
(2) to consider and vote upon approval of the terms of the merger agreement
whereby Fusion Networks will be become a wholly-owned subsidiary of FNHI and the
issuance of FNHI common stock as contemplated by the merger agreement;
(3) to authorize an amendment to the IDM Environmental Corp. 1998
Comprehensive Stock Option and Award Plan to (a) increase the number of shares
of common stock reserved for issuance under 1998 Stock Option Plan by an
additional 1,600,000 shares, and (b) fix a maximum of 400,000 shares which may
be subject to awards granted under the 1998 Stock Option Plan to any individual
in any calendar year; and
(4) to transact such other business as may properly come before the special
meeting.
Record Date
IDM's board has fixed the close of business on February 24, 2000 as the
record date for determination of IDM stockholders entitled to notice of and to
vote at the special meeting.
Voting of Proxies
We request that IDM stockholders complete, date and sign the accompanying
proxy and promptly return it in the accompanying envelope or otherwise mail it
to IDM. Brokers holding shares in "street name" may vote the shares only if the
stockholder provides instructions on how to vote. Brokers will provide
directions on how to instruct the broker to vote the shares. All properly
executed proxies that IDM receives prior to the vote at the special meeting, and
that are not revoked, will be voted in accordance with the instructions
indicated on the proxies or, if no direction is indicated, to approve each of
the matters submitted to IDM shareholders for approval, including the holding
company reorganization and the terms of the merger agreement. IDM's board does
not currently intend to bring any other business before the special meeting and,
so far as IDM's board knows, no other matters are to be brought before the
special meeting. If other business properly comes before the special meeting,
the proxies will vote in accordance with their own judgment.
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Stockholders may revoke their proxies at any time prior to its use
(1) by delivering to the Secretary of IDM a signed notice of revocation or
a later-dated, signed proxy; or
(2) by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
Votes Required
As of the close of business on February 24, 2000, there were 3,775,876
shares of IDM common stock outstanding and entitled to vote. The holders of a
majority of the shares of IDM common stock entitled to vote and that are present
or represented by proxy at the IDM meeting must approve each of the proposals
submitted for consideration by the IDM stockholders, including the holding
company reorganization, the terms of the merger agreement and the plan amendment
proposal. IDM stockholders have one vote per share of IDM common stock owned on
the record date. Approval of each of the proposals submitted to the IDM
stockholders is conditional on approval of the other proposals.
As of February 24, 2000, directors and executive officers of IDM and their
affiliates beneficially owned an aggregate of 47,105 shares of IDM common stock
(exclusive of any shares issuable upon the exercise of options) or approximately
1.2% of the shares of IDM common stock outstanding on such date. The directors
and executive officers of IDM have indicated their intention to vote their
shares of IDM common stock in favor of each of the proposals submitted for
approval by the IDM stockholders. As of February 24, 2000, directors and
executive officers of Fusion Networks owned no shares of IDM common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is holders, present or by proxy, of a majority of the shares of IDM common stock
issued and outstanding on the record date. Abstentions and broker non-votes each
will be included in determining the number of shares present and voting at the
meeting for the purpose of determining the presence of a quorum. Brokers holding
shares for beneficial owners cannot vote on the actions proposed in this joint
proxy statement/prospectus without the owners' specific instructions.
Accordingly, IDM stockholders are urged to return the enclosed proxy card marked
to indicate their vote. Abstentions and broker non-votes will not be included in
vote totals and will have no effect on the outcome of the votes on any of the
matters submitted for approval by the IDM stockholders.
Solicitation of Proxies and Expenses
IDM and Fusion Networks will each bear its own expenses in connection with
the solicitation of proxies for its special meeting of shareholders, including
printing and filing costs and expenses incurred in connection with the
registration statement and this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of IDM may solicit proxies from their respective shareholders by telephone,
facsimile or in person. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy materials to beneficial owners.
Board Recommendation
The IDM board has determined that the holding company reorganization, the
merger agreement and each of the transactions proposed in connection therewith
are advisable and fair to, and in the best interests of, IDM and its
stockholders. Accordingly, the board unanimously has approved the merger
agreement and unanimously recommends that stockholders vote FOR approval of the
terms of the holding company reorganization, the merger agreement and each of
the other proposals submitted hereby to the IDM stockholders. Members of IDM's
board have additional interests in making the recommendation and in voting to
approve the merger. See "The Merger - Interests of Certain Persons in the
Merger."
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The matters to be considered at the special meeting are of great importance
to IDM stockholders. Accordingly, IDM stockholders are urged to read and
carefully consider the information presented in this joint proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
IDM stockholders should not send any stock certificates with their proxy
cards.
THE FUSION NETWORKS SPECIAL MEETING
General
We are furnishing this joint proxy statement/prospectus to holders of
Fusion Networks, Inc. common stock in connection with the solicitation of
proxies by the Fusion Networks board of directors for use at the special meeting
of shareholders of Fusion Networks to be held on March 27, 2000, and any
adjournment or postponement thereof.
This joint proxy statement/prospectus is first being furnished to
shareholders of Fusion Networks on or about February 29, 2000. This joint proxy
statement/prospectus is also furnished to Fusion Networks shareholders as a
prospectus in connection with the issuance by Fusion Networks Holdings of shares
of common stock as contemplated by the merger agreement.
Date, Time and Place
The special meeting will be held on Monday, March 27, 2000 at 10:00 a.m.,
local time, at the corporate offices of Fusion Networks, Inc. at 8115 N.W. 29th
Street, Miami, Florida 33122.
Matters to be Considered at the Special Meeting
At the Fusion Networks special meeting and any adjournment or postponement
of the special meeting, Fusion Networks shareholders will be asked:
(1) to consider and vote upon the adoption of the merger agreement and
related transactions in the merger agreement; and
(2) to transact such other business as may properly come before the
special meeting.
Record Date
Fusion Network's board has fixed the close of business on February 24, 2000
as the record date for determination of Fusion Networks shareholders entitled to
notice of and to vote at the special meeting.
Voting of Proxies
We request that shareholders of Fusion Networks complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Fusion Networks. Brokers holding shares in "street name"
may vote the shares only if the shareholder provides instructions on how to
vote. Brokers will provide directions on how to instruct the broker to vote the
shares. All properly executed proxies that Fusion Networks receives prior to the
vote at the special meeting, and that are not revoked, will be voted in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve the merger agreement and the merger. Fusion Networks'
board does not currently intend to bring any other business before the special
meeting and, so far as Fusion Networks' board knows, no other matters are to be
brought before the special meeting. If other business properly comes before the
special meeting, the proxies will vote in accordance with their own judgment.
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Shareholders may revoke their proxies at any time prior to its use
(1) by delivering to the Secretary of Fusion Networks a signed notice of
revocation or a later-dated, signed proxy; or
(2) by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
Votes Required
As of the close of business on February 24, 2000, there were 33,113,333
shares of Fusion Networks common stock outstanding and entitled to vote.
Pursuant to the terms of the merger agreement, the holders of a majority of the
outstanding shares of Fusion Networks common stock entitled to vote thereon must
approve the merger agreement and the merger. Fusion Networks shareholders have
one vote per share of Fusion Networks common stock owned on the record date.
As of February 24, 2000, directors and executive officers of Fusion
Networks and their affiliates beneficially owned an aggregate of 8,239,333
shares of Fusion Networks common stock (exclusive of any shares issuable upon
the exercise of options) or approximately 24.9% of the shares of Fusion Networks
common stock outstanding on such date. The directors and executive officers of
Fusion Networks have indicated their intention to vote their shares of Fusion
Networks common stock in favor of the merger agreement. As of February 24, 2000,
directors and executive officers of IDM owned no shares of Fusion Networks
common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is holders, present or by proxy, of a majority of the shares of Fusion Networks
common stock issued and outstanding on the record date. Abstentions and broker
non-votes each will be included in determining the number of shares present and
voting at the meeting for the purpose of determining the presence of a quorum.
Because approval of the merger agreement and the consummation of the merger
requires the affirmative vote of a majority of the outstanding shares of Fusion
Networks common stock entitled to vote, abstentions and broker non-votes will
have the same effect as votes against the merger agreement and the consummation
of the merger. In addition, the failure of a Fusion Networks shareholder to
return a proxy or vote in person will have the effect of a vote against the
approval of the merger agreement and the merger. Brokers holding shares for
beneficial owners cannot vote on the actions proposed in this joint proxy
statement/prospectus without the owners' specific instructions. Accordingly,
Fusion Networks shareholders are urged to return the enclosed proxy card marked
to indicate their vote.
Solicitation of Proxies and Expenses
IDM and Fusion Networks will each bear its own expenses in connection with
the solicitation of proxies for its special meeting of shareholders, including
printing and filing costs and expenses incurred in connection with the
registration statement and this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of Fusion Networks may solicit proxies from their respective shareholders by
telephone, facsimile or in person. Brokerage houses, nominees, fiduciaries and
other custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy materials to beneficial owners.
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Board Recommendations
The Fusion Networks board has determined that the merger agreement and the
merger are advisable and in the best interests of Fusion Networks and its
shareholders. Accordingly, the board unanimously has approved the merger
agreement and unanimously recommends that shareholders vote FOR approval of the
merger agreement and the merger. Members of Fusion Networks' board have
additional interests in making the recommendation and in voting to approve the
merger. See "The Merger - Interests of Certain Persons in the Merger."
The matters to be considered at the special meeting are of great importance
to the shareholders of Fusion Networks. Accordingly, Fusion Networks
shareholders are urged to read and carefully consider the information presented
in this joint proxy statement/prospectus, and to complete, date, sign and
promptly return the enclosed proxy in the enclosed postage-paid envelope.
Fusion Networks' shareholders should not send any stock certificates with
their proxy cards. A transmittal form with instructions for the surrender of
Fusion Networks common stock certificates will be mailed to Fusion Networks
shareholders promptly after completion of the merger. For more information
regarding the procedures for exchanging Fusion Networks stock certificates for
FNHI stock certificates, see "The Merger Agreement and Related
Agreements--Exchange of Stock Certificates."
THE MERGER
This section of the joint proxy statement/prospectus describes material
aspects of the proposed merger, including the holding company reorganization and
merger agreement. While we believe that the description covers the material
terms of the merger and the related transactions, this summary may not contain
all of the information that is important to IDM stockholders and Fusion Networks
shareholders. Shareholders should read the entire merger agreement and the other
documents we refer to carefully and in their entirety for a more complete
understanding of the merger.
The following discussion of the background of the merger and the parties'
reasons for the merger and the potential benefits that could result from the
merger contains forward-looking statements that involve risks and uncertainties.
Readers are cautioned not to place undue reliance on these forward-looking
statements. The actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth under "Risk Factors."
Background of the Merger
In early July 1999, Joseph Salvani, a financial consultant to IDM,
approached IDM's senior management regarding the possibility of IDM making a
strategic acquisition of an Internet company. Mr. Salvani indicated that he was
aware of Fusion Networks through discussions with investors in Fusion Networks
and that he believed Fusion Networks would be interested in pursuing a
combination with a publicly held company. Frank Falco and Joel Freedman, the
Chairman and Chief Executive Officer of IDM, indicated that management of IDM
would be willing to evaluate and present any reasonable acquisition
opportunities to the board for consideration.
On July 13, 1999, Mr. Freedman of IDM and Mr. Salvani met with Hernando
Bahamon, President of Fusion Networks, along with financial advisers of Fusion
Networks to discuss a proposal to acquire Fusion Networks. Fusion Networks
indicated that they would be willing to consider a combination with IDM if the
dilution to Fusion Networks shareholders did not exceed 11%. IDM, in turn,
indicated that the 11% interest would be acceptible provided that its board
received an opinion indicating the fairness of the transaction. In those
discussions, Mr. Bahamon, acting on behalf of Fusion Networks, and Mr. Falco and
Mr. Freedman, acting on behalf of IDM, agreed to a basic structure by which IDM
would acquire Fusion Networks in exchange for stock to be issued to the Fusion
Networks stockholders representing approximately 90% control following the
transaction and subject to board approval, review by legal counsel and receipt
of a fairness opinion by IDM, among other conditions.
Over the following days, Oscar Folger, counsel to Fusion Networks, and
Michael Sanders of Vanderkam & Sanders, counsel to IDM, conducted a series of
telephone conversations regarding the proposed transaction. On the advice of Mr.
Folger, Fusion Networks indicated that it would not be interested in pursuing
the acquisition unless IDM could be restructured into a holding company
structure thereby insulating the operations of IDM and Fusion Networks from each
other. Based on the advice of counsel to Fusion Networks and the financial
advisers, IDM and Fusion Networks agreed to a more detailed structure by which
IDM would reorganize into a holding company structure immediately, if permitted
under New Jersey law, and cause the newly formed holding company to enter into
an acquisition agreement under which the holding company would issue
approximately 20% of its common
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<PAGE>
stock plus shares of preferred stock convertible into approximately 70% of the
common stock of the holding company in exchange for 100% of the stock of Fusion
Networks. That agreement in principle was subject to review by legal counsel for
IDM, receipt of a fairness opinion by IDM and board approval of IDM, among other
conditions.
On July 18, 1999, the board of directors of IDM held a special meeting to
consider the proposed acquisition of Fusion Networks. At that meeting, the board
of directors determined that pursuing the acquisition of Fusion Networks was in
the best interests of IDM and its shareholders and approved the general concept
of the acquisition and authorized management to execute a letter of intent to
pursue the acquisition subject to further board action regarding the final terms
of the transaction and receipt of appropriate legal guidance and fairness
opinions, among other conditions.
On July 22, 1999, the board of directors of Fusion Networks approved the
terms of the proposed merger of Fusion Networks with a subsidiary of a holding
company to be formed by IDM.
On July 23, 1999, IDM and Fusion Networks signed a letter of intent
pursuant to which IDM agreed in principle to issue to the shareholders of Fusion
Networks, in exchange for all of the outstanding stock of Fusion Networks,
625,000 shares of common stock and shares of non-voting preferred stock
convertible into 26,000,000 shares of common stock of IDM. The letter of intent
was subject to usual conditions, including satisfactory completion of due
diligence and execution of definitive documentation.
Prior to its discussion with Fusion Networks, IDM did not consider or have
discussions with any other potential business combination candidates since
January 1999. Following the commencement of discussions with Fusion Networks,
IDM and its representatives did not meet with or consider other Internet
companies.
On July 23, 1999, IDM retained Chartered Capital Advisers, Inc. to evaluate
the terms of the proposed acquisition and render an opinion as to the fairness
of the terms of the transaction to IDM and its shareholders.
In late July and early August, 1999, Mr. Sanders and Mr. Folger spoke by
phone repeatedly regarding the structure of the proposed acquisition and
documentation. Mr. Sanders and Mr. Folger agreed that New Jersey counsel should
be retained to evaluate the ability of IDM to carry out a restructuring to form
a holding company structure without shareholder approval.
On August 10, 1999, Mr. Falco, Mr. Freedman, two officers and two directors
of IDM attended a presentation of Fusion Networks to review their business plan
and view a demonstration of their technology. At that meeting, IDM's
representatives received copies of Fusion Networks' business plan and internal
projections of operating results through 2002. Members of IDM's board and
management were also provided with technical evaluations of Fusion Networks'
business and technology prepared for then existing investors in Fusion Networks.
On August 11, 1999, Chartered Capital Advisers, Inc. delivered a
preliminary draft of its proposed fairness opinion for review by management and
counsel of IDM.
On August 11, 1999, the board of directors of IDM and Mr. Sanders
participated in a conference call along with an unpaid Internet consultant who
had been requested to review the Fusion Networks business plan and technology.
During the conference call, the outside directors and Mr. Sanders heard a
presentation and evaluation from the Internet consultant and participated in an
extended question and answer session. The conference was to be part of a special
board meeting to consider revisions to certain details of the acquisition. The
board meeting was cancelled and rescheduled for the following morning.
On August 12, 1999, the board of directors of IDM held a special meeting by
telephone and discussed the status of and modifications to the terms of the
transaction as well as the content of the draft fairness opinion. The board
approved the terms of the acquisition as set forth in the Agreement and Plan of
Merger provided to them.
On August 13, 1999 IDM retained Friedman Siegelbaum LLP as counsel to
render appropriate tax opinions in connection with the proposed acquisition and
to research and advise IDM regarding the ability to restructure into a holding
company structure without seeking shareholder approval.
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<PAGE>
While Friedman Siegelbaum was researching the holding company issue, Mr.
Sanders drafted an Agreement and Plan of Merger and Certificate of Designation
reflecting the structure agreed to and assuming the prior completion of the
holding company restructuring. Mr. Folger and Mr. Sanders made a series of
revisions to the proposed documents.
On August 17, 1999, Friedman Siegelbaum advised Mr. Sanders and IDM that
its preliminary research indicated that the holding company restructuring could
not be carried out without first obtaining shareholder approval. Mr. Sanders,
Mr. Falco, Mr. Freedman and Mr. Salvani then spoke by phone regarding
alternative structures to preserve the transaction. Mr. Folger was conferenced
into the conversation and informed of the opinion of New Jersey counsel and the
suggestion of IDM's management and counsel that the holding company
restructuring be deferred until shareholder approval could be obtained
simultaneous with a shareholder vote on the acquisition. Mr. Folger indicated
that he would speak with management of Fusion Networks and would contact Mr.
Sanders to advise of their position.
Later on August 17, 1999, Mr. Folger contacted management of Fusion
Networks by phone and discussed the holding company issue and the possibility of
closing the holding company restructuring and acquisition simultaneously
following a shareholder vote. Management of Fusion Networks informed Mr. Folger
that it would move forward with the transaction on the basis discussed with a
single closing following shareholder approval. Mr. Folger then advised Mr.
Sanders by phone that the transaction could proceed as discussed and that the
documents would need to be revised to reflect the formation of the holding
company and consummation of the acquisition following shareholder approval with
the consideration to be given to Fusion Network shareholders to be entirely in
common stock of the holding company. Mr. Sanders then advised Mr. Falco and Mr.
Freedman of the conversation with Mr. Folger and began revisions to the merger
documents to reflect the same.
On August 18, 1999, the board of directors of IDM held a special meeting to
review the revised terms and structure of the acquisition and to approve the
revised Agreement and Plan of Merger and the Plan of Reorganization and Merger
relating to formation of a holding company. After extensive discussions of the
advantages and potential risks of the proposed acquisition as described herein
under "Reasons for the Merger; Recommendation of the Board of Directors," the
board unanimously approved the acquisition on the terms presented and authorized
management to execute the appropriate documents.
The merger agreement and related transaction documents were executed by the
parties on August 18, 1999. IDM announced the signing of the definitive
agreements on the morning of August 19, 1999.
Reasons for the Merger; Recommendations of the Boards of Directors
-- IDM Environmental Corp.
The decision by IDM's board to approve the merger was based on several
potential benefits of the merger that it believes will contribute to the success
of the combined company and maximization of shareholder value. These potential
benefits include:
. the ability to participate in an attractive early stage Internet business
model;
. the ability to diversify IDM's operations;
. the ability to support a substantially higher market valuation based on
potential Internet revenue streams; and
. the ability to attract capital.
33
<PAGE>
IDM's board reviewed a number of factors in evaluating the merger,
including, but not limited to, the following:
. historical information concerning IDM's and Fusion Networks' respective
businesses, financial performance and condition, operations, technology and
management;
. IDM management's view of the financial condition, results of operations
and businesses of IDM and Fusion Networks before and after giving effect to the
merger and the IDM board's determination of the merger's effect on shareholder
value;
. current financial market conditions and historical market prices,
volatility and trading information;
. the consideration Fusion Networks' shareholders will receive in the
merger in light of comparable merger transactions;
. the belief that the terms of the merger agreement are reasonable;
. the impact of the merger on IDM's customers and employees;
. results of the due diligence investigation conducted by IDM's management,
accountants, financial advisors and counsel; and
. discussions with Chartered Capital Advisers, Inc. regarding the financial
terms of the merger, and Chartered Financial Advisers' opinion described below,
to the effect that, subject to the qualifications and limitations set forth in
Chartered Financial Advisers' written opinion, the merger was fair to IDM and
its shareholders from a financial point of view as of the date of the opinion.
The IDM board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger including the
following:
. the risk that the potential benefits of the merger may not be realized;
. the level of dilution to be experienced by IDM shareholders;
. the possibility that the merger may not be consummated, even if approved
by IDM's and Fusion Networks' shareholders;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined company, key
technical, sales and management personnel might not remain employed by the
combined company; and
. other applicable risks described in this joint proxy statement/prospectus
under "Risk Factors."
IDM's board concluded, however, that, on balance, the merger's potential
benefits to IDM and its stockholders outweighed the associated risks. The
discussion of the information and factors considered by IDM's board reflects all
material factors considered by the board. In view of the variety of factors
considered in connection with its evaluation of the merger, IDM's board did not
find it practicable to, and did not quantify or otherwise assign relative weight
to, the specific factors considered in reaching its determination.
34
<PAGE>
In reaching its determination, IDM's board of directors also considered and
evaluated, among other things, (i) the results and scope of the due diligence
review conducted by members of the management of, and financial advisors to, IDM
with respect to the business and operations of Fusion Networks, (ii) information
with respect to recent and historical trading prices of IDM common stock and of
Internet stocks generally, (iii) information concerning the results of
operations, performance, financial condition and prospects of IDM and the
financial condition and prospects of Fusion Networks on a company-by-company
basis and on a combined basis, (iv) the terms of the merger agreement and the
other agreements contemplated thereby, (v) the structure of the merger and (vi)
the tax consequences of the merger.
-- Fusion Networks, Inc.
The decision by Fusion Networks board to approve the merger was based on a
number of factors, including the following material factors, each of which the
board viewed as indicating the potential benefits of the merger:
. the number and quality of potential merger partners contacted;
. the ability of Fusion Networks shareholders to participate in the future
prospects of Fusion Networks and IDM following the merger, and its belief that
such prospects would be substantially enhanced by the merger, which would create
a larger, better capitalized and diversified company;
. the combined company should have better access to the capital markets
than Fusion Networks as a stand-alone privately held entity; and
. the level of ownership of the Fusion Networks shareholders in the
combined company.
The Fusion Networks board also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following:
. the significant costs involved in connection with consummating the merger
and the substantial management time and effort required to effectuate the
merger;
. Fusion Networks shareholders will not maintain their current percentage
ownership of Fusion Networks in the combined company;
. because the exchange ratio of FNHI common stock for Fusion Networks
common stock is fixed, the common stock that Fusion Networks shareholders will
receive in the merger may have a lesser value than the value contemplated at the
time the merger agreement was signed because of a decrease in the market price
of IDM or Fusion Networks common stock;
. the risk that the merger might not be completed based upon the failure to
satisfy certain covenants or closing conditions; and
. the risk that the anticipated benefits of the merger might not be fully
realized.
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<PAGE>
Fusion Networks' board concluded, however, that, on balance, the merger's
potential benefits to Fusion Networks and its shareholders outweighed the
associated risks. The discussion of the information and factors considered by
Fusion Networks' board reflects all material factors considered by the board. In
view of the variety of factors considered in connection with its evaluation of
the merger, Fusion Networks' board did not find it practicable to, and did not
qualify or otherwise assign relative weight to, the specific factors considered
in reaching its determination.
In reaching its determination, Fusion Networks' board of directors also
considered and evaluated, among other things, (i) the results and scope of the
due diligence review conducted by members of the management of Fusion Networks
and its legal counsel and financial advisers with respect to the business and
operations of IDM, (ii) information with respect to recent and historical
trading prices and trading multiples of IDM common stock and of Internet stocks
generally, (iii) information concerning the results of operations, performance,
financial condition and prospects of IDM and the financial condition and
prospects of Fusion Networks on a company-by-company basis and on a combined
basis, (iv) the terms of the merger agreement and the other agreements
contemplated thereby, (v) the structure of the merger and (vi) the tax
consequences of the merger.
Opinion of Financial Advisor to IDM
Pursuant to an engagement letter dated July 23, 1999, IDM engaged Chartered
Capital Advisers, Inc. to render an opinion as to the fairness of the merger,
from a financial point of view, to the stockholders of IDM.
On August 18, 1999, Chartered Capital Advisers delivered to the IDM board
its written opinion that, as of August 18, 1999 and based on the assumptions
made, the matters considered and the limitations on the review undertaken
described in the opinion, the merger was fair from a financial point of view to
the stockholders of IDM. No limitations were imposed by the IDM board on
Chartered Capital Advisers with respect to the investigations made or procedures
followed by it in furnishing its opinion. The terms of the merger were
determined through negotiations between the respective managements of IDM and
Fusion Networks without the assistance of, or input from, Chartered Capital
Advisers.
The full text of the Chartered Capital Advisers opinion, which sets forth,
among other things, assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix G and is incorporated in this proxy
statement/prospectus by reference. We urge IDM stockholders to read the
Chartered Capital Advisers opinion in its entirety. The Chartered Capital
Advisers opinion was prepared for the benefit and use of the IDM board in its
consideration of the merger and does not constitute a recommendation to
stockholders of IDM as to how they should vote upon, or take any other action
with respect to, the merger.
The Chartered Capital Advisers opinion does not address:
. the relative merits of the merger and the other business strategies that
the IDM board has considered or may be considering; or
. the underlying business decision of the IDM board to proceed with the
merger.
The summary of the Chartered Capital Advisers opinion set forth in this
proxy statement/prospectus is qualified in its entirety by reference to the full
text of the Chartered Capital Advisers opinion.
In connection with the preparation of the Chartered Capital Advisers
opinion, Chartered Capital Advisers, among other things:
. reviewed the merger agreement;
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<PAGE>
. analyzed a business plan and financial projections prepared by Fusion
Networks;
. interviewed an Internet consultant utilized by IDM to evaluate Fusion
Networks;
. analyzed information with respect to IDM, including unaudited financial
statements as of and for the six months ended June 30, 1999, audited financial
statements as of and for the five years ended December 31, 1998, a business plan
that was prepared during 1999, press releases, marketing information, and
various internal management documents;
. reviewed various documents filed by IDM with the Securities and Exchange
Commission, including but not limited to the Forms 10-K for the three years
ended December 31, 1998, the Form 10-Q for the two quarters ended June 30, 1999,
the amended Form 8-K filed as of June 21, 1999, and the Schedule 14A filed as of
April 30, 1999;
. interviewed the management of Fusion Networks and their advisors and held
discussions regarding the past, current, and planned operations, financial
condition, and business prospects of Fusion Networks;
. visited the facilities of IDM and held discussions with certain members
of its management and its advisors concerning the past, current, and planned
operations, financial condition, and business prospects of IDM;
. analyzed historical stock prices of IDM;
. discussed with the legal advisors of IDM the results of their due
diligence;
. considered relevant data of IDM and Fusion Networks, and compared that
data with applicable data for publicly held companies with investment
characteristics relevant to IDM and Fusion Networks;
. considered relevant data of IDM and Fusion Networks, and compared that
data with applicable data for certain business combinations and other
transactions that have recently been effectuated;
. considered relevant data of Fusion Networks, and compared that data with
applicable data for certain venture capital transactions that have recently been
effectuated;
. considered the prospective financial performance of IDM and Fusion
Networks;
. considered the financial condition, historical losses, and strategic and
financing alternatives of IDM;
. considered the potential impact of the merger upon the future stock price
of the FNHI;
. considered the relative values of IDM and Fusion Networks;
. considered U.S. securities laws limitations that would, for the twelve
months following the merger, limit dispositions in the secondary market of FNHI
common stock by the principal IDM shareholders;
. considered U.S. securities laws limitations that would, for the twelve
months following the merger, prohibit dispositions in the secondary market of
FNHI common stock by Fusion Networks shareholders; and
. considered such other information, financial studies, and analyses as
deemed relevant, and performed such analyses, studies, and investigations as
deemed appropriate.
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<PAGE>
In its review and analysis, and in arriving at its opinion, Chartered
Capital Advisers assumed and relied upon the accuracy and completeness of all of
the financial and other information provided to it (including information
furnished to it orally or otherwise discussed with it by the management of IDM
and Fusion Networks) or publicly available and neither attempted to verify, nor
assumed responsibility for verifying, any of such information. Chartered Capital
Advisers relied upon the assurances of management of IDM and Fusion Networks
that they were not aware of any facts that would make such information
inaccurate or misleading. Furthermore, Chartered Capital Advisers did not obtain
or make, or assume any responsibility for obtaining or making, any independent
evaluation or appraisal of the properties, assets or liabilities (contingent or
otherwise) of IDM or Fusion Networks, nor was Chartered Capital Advisers
furnished with any such evaluation or appraisal. Chartered Capital Advisers also
assumed that management of Fusion Networks would be able to complete its website
and make it available to the public without significant service problems within
the time frame and at costs that Fusion Networks management represented as being
achievable.
Projections of operating results of Fusion Networks. In connection with the
merger negotiations and the analysis performed by Chartered Capital Advisers,
Fusion Networks provided to both IDM and Chartered Capital Advisers internally
developed projections of operating results of Fusion Networks through 2002.
Those projections were prepared by Fusion Networks as of August 9, 1999 and
reflect the following projected levels of site traffic, revenues and net income
(loss):
Year Ended December 31,
------------------------------------
1999 2000 2001 2002
------ ------ ------ ------
Projected user sessions (,000)......... 4,513 59,968 149,669 408,546
Projected revenues ($,000)............. 0 15,292 45,649 165,461
Projected advertising revenues......... 0 15,292 45,649 165,461
Projected e-commerce revenues.......... 0 906 2,262 6,174
Projected net income(loss) ($,000).....(1,364) (20,849) (13,461) 33,940
In preparing the projected consolidated income statements, Fusion Networks
inadvertently omitted from its total projected revenues and net income projected
e-commerce revenues. Were e-commerce revenues to be included, the total
projected revenues would have been $0 for 1999, $16,198,000 for 2000,
$47,911,000 for 2001 and $171,635,000 for 2002.
The actual results achieved by Fusion Networks may vary from projected
results and the variations may be material.
With respect to the financial forecasts and projections (and the
assumptions and bases therefor) for Fusion Networks that Chartered Capital
Advisers reviewed, upon the advice of the management of Fusion Networks,
Chartered Capital Advisers assumed that such forecasts and projections:
. had been reasonably prepared in good faith on the basis of reasonable
assumptions;
. reflected the best available estimates and judgments as to the future
financial condition and performance of Fusion Networks and
. will be realized in the amounts and in the time periods estimated.
In addition, Chartered Capital Advisers assumed that:
. the merger will be consummated upon the terms set forth in the merger
agreement without material alteration thereof; and
. the merger will be treated as a tax-free reorganization pursuant to the
Internal Revenue Code of 1986, as amended.
Chartered Capital Advisers noted certain risks pertaining to Fusion Networks,
including:
. a limited operating history;
. its web site was not yet operational;
. dependence upon key members of management;
. need to expand the management team, recruit employees, and commence
operations in several locations;
. risk of technological problems that could impede the ability of its web
site to operate at an effective level;
. risk of technological obsolescence;
. need to develop mutually beneficial relationships with advertisers,
content providers, and strategic partners;
. reliance on telecommunications systems in diverse markets whose quality
and consistency varies;
. need to gain visibility among Internet users in diverse markets;
. lack of historical revenues, and lack of any material projected revenues
during the remainder of 1999;
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<PAGE>
. competition from companies that are already generating revenues and which
have significantly greater financial resources than the collective financial
resources of Fusion Networks and IDM;
. requirement for significant funding whose availability, terms, and cost
cannot currently be assured; and
. significant prospective dilution of current IDM shareholders' aggregate
position in FNHI due to the need to fund the prospective growth of Fusion
Networks.
Chartered Capital Advisers noted that, notwithstanding those risks, the
management of IDM and Fusion Networks and their advisors believe that Fusion
Networks has the potential to realize significant capital appreciation on a
near-term and long-term basis.
Chartered Capital Advisers also noted certain risks pertaining to IDM,
including:
. continuing losses incurred by IDM since going public in 1994; and
. lack of any immediate plans to raise additional capital in the event that
prospective losses and/or capital requirements could cause IDM to require
additional capital.
Although developments following the date of the Chartered Capital Advisers
opinion may affect the opinion, Chartered Capital Advisers assumed no obligation
to update, revise or reaffirm its opinion. The Chartered Capital Advisers
opinion is necessarily based upon market, economic and other conditions as in
effect on, and information made available to Chartered Capital Advisers as of,
the date of the Chartered Capital Advisers opinion. It should be understood that
subsequent developments may affect the conclusion expressed in the Chartered
Capital Advisers opinion and that Chartered Capital Advisers disclaims any
undertaking or obligation to advise any person of any change in any matter
affecting the opinion which may come or be brought to its attention after the
date of the opinion. The Chartered Capital Advisers opinion is limited to the
fairness, from a financial point of view and as of the date thereof, of the
merger to the shareholders of IDM.
In analyzing the terms of the proposed merger, the financial advisor
considered the estimated value of the proposed consideration to be conveyed and
received by the IDM shareholders. The consideration to be conveyed by the IDM
shareholders consists of the issued and outstanding common stock of IDM. The
median market capitalization of IDM common stock between January 4, 1999 and
July 19, 1999, two weeks prior to the announcement of the proposed merger, was
approximately $1.5 million. The proposed consideration to be received by the IDM
shareholders would consist of approximately 88.9% of the post-merger entity. The
principal methods used by the financial advisor to evaluate the consideration
received from Fusion Networks are described below.
Comparable company market capitalization. The financial advisor identified
four publicly held companies whose market capitalization provided a relevant
basis for estimating the value of Fusion Networks in connection with the
proposed Merger. The companies identified were: Global Data Tel, Inc.; IFX
Corporation; quepasa.com, inc.; and StarMedia, Inc. All but StarMedia had market
capitalizations ranging from $125 million to $195 million as of August 17, 1999;
the market capitalization of StarMedia was approximately $2.8 billion as of that
date. The financial advisor used the market capitalizations of the
aforementioned companies, discounted those amounts to take into consideration
the earlier stage of development of Fusion Networks in relation to these
companies, as well as the potential impact of future ownership dilution. This
analysis resulted in a range of value of $19 million to $87 million.
Comparable company capitalization multiples. The financial advisor
developed a range of value based on multiples of projected revenues and
projected earnings to provide a relevant basis for estimating the value of
Fusion Networks in connection with the proposed merger. Capitalization multiples
of projected revenues and earnings were developed for four publicly traded
companies whose Latin American Internet activities constituted all or a major
portion of their value. Those companies were selected as being relevant for
estimating value for Fusion Networks from a universe consisting of more than 200
companies analyzed in the Internet sector. The capitalization multiples
reflected the market capitalization of each company at August 17, 1999 as a
multiple of projected revenues for the years 2000, 2001, and 2002, and market
capitalization as a multiple of projected earnings for the year 2002. The
capitalization multiples were based on publicly available revenue and earnings
projections developed by analysts employed by leading securities firms. In each
case, quepasa.com had the lowest multiple: 12.2 times projected revenues in the
year 2000, 4.3 times projected revenues in the year 2001, 2.4 times projected
revenues in the year 2002, and 7.4 times projected pretax income in the year
2002. The financial advisor applied these multiples, using a range of 25%, to
adjusted revenues and earnings projections for Fusion Networks. The adjusted
projections reflected revenues that were 10% and 25% of the amounts projected by
Fusion Networks management for the years 2000 through 2002, and 2% and 5% of the
pretax income projected by Fusion Networks management for the year 2002. These
alternative values were weighted, and resulted in a range of value of $34
million to $127 million.
Discounted cash flow analysis. The financial advisor applied discounted
cash flow analysis to provide a relevant basis for estimating the value of
Fusion Networks in connection with the proposed merger. The projections used
were the same that were used in the comparable company analysis described in the
preceding paragraph. The revenue capitalization and earnings capitalization
multiples were based on multiples of 146 publicly traded Internet companies that
were developed by the financial advisor as of July 31, 1999. Based on these a
review of these multiples, the financial advisor developed revenue
capitalization multiples of 9.3 and 12.4 for the year 2000, and reduced these
multiples by 25% each year to take into consideration the declining multiple
that would result from a company becoming larger and coming closer to realizing
its potential value. Earnings capitalization multiples of 40.0 and 60.0 were
applied to projected earnings. The alternative projected capitalized values were
discounted to a present value at annual discount rates ranging from 45% to 60%,
and weighted according to their relative significance, with heavier weights
being applied to the earlier and smaller values. The resulting values ranged
from $22 million to $59 million.
Venture capital analysis. The financial advisor considered pricing of
relevant development-stage companies to provide an alternative basis for
estimating the value of Fusion Networks in connection with the proposed merger.
Of the transactions analyzed, those deemed to be most relevant were the pre-IPO
pricing of capital infusions into quepasa.com and StarMedia at the stage when
these companies had little or no revenues. The relevant transactions occurred in
1997 and 1998. The resulting values were increased by 50% to take into
consideration the more robust pricing environment for investments in Latin
American Internet investments that has existed during 1999. This resulted in a
range of value of $11 million to $57 million.
The values resulting from the analyses described above are summarized
below. In all but one instance, the portion of the pro forma combined value to
be distributed to the IDM shareholders exceeds the median year-to-date market
capitalization of IDM common stock through July 14, 1999.
SUMMARY OF VALUATION ANALYSES (Amounts $000)
--------------------------------------------
<TABLE>
Range of Value IDM Combined Value 11.1% of Combined Value2
Value1
Valuation basis Minimum Maximum Minimum Maximum Minimum Maximum
- ------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable company market $19,000 $87,000 $1,545 $20,545 $88,545 $2,281 $9,829
capitalization
Comparable company 34,000 127,000 1,545 35,545 128,545 3,946 14,269
capitalization analysis
Discounted cash flow 22,000 59,000 1,545 23,545 60,545 2,614 6,721
analysis
Venture capital analysis 11,000 57,000 1,545 12,545 58,545 1,393 6,499
</TABLE>
- ---------------
1 IDM value reflects median market capitalization 1/4/99 through 7/14/99
2 11.1% is IDM shareholders' approximate share of post-merger company, based
on common shares outstanding as of August 1, 1999
The financial advisor also considered the potential value of IDM in the
event of a sale to, or merger with, an alternative acquirer. In such instances,
it is common for the shareholders of the target company to receive a premium
over the pre-announcement price per share of the common stock of their company.
The majority of acquisition premia are less than 40%. Historically, less than
10% of acquisitions result in premia at or above 100%. The majority of the
valuation analyses shown above result in pro forma values allocatable to the IDM
shareholders that are in excess of a 100% premium above the median year-to-date
capitalized value of IDM common stock.
While the foregoing summary describes analyses and factors that Chartered
Capital Advisers deemed material in its presentation to the IDM board, it is not
a comprehensive description of all analyses and factors considered by Chartered
Capital Advisers. The preparation of a fairness opinion is a complex process
that involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Chartered Capital Advisers believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the Chartered Capital Advisers opinion. Several analytical
methodologies were employed and no one method of analysis should be regarded as
critical to the overall conclusion reached by Chartered Capital Advisers. Each
analytical technique has inherent strengths and weaknesses, and the nature of
the available information may further affect the value of particular techniques.
The conclusions reached by Chartered Capital Advisers are based on all analyses
and factors taken as a whole and also on application of Chartered Capital
Advisers' own experience and judgment. Such conclusions may involve significant
elements of subjective judgment and qualitative analysis. Chartered Capital
Advisers therefore gives no opinion as to the value or merit standing alone of
any one or more parts of the analysis it performed. In performing its analyses,
Chartered Capital Advisers considered general economic, market and financial
conditions and other matters, many of which are beyond the control of IDM and
Fusion Networks. The analyses performed by Chartered Capital Advisers are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be
purchased. Furthermore, no opinion is being expressed as to the prices at which
shares of IDM common stock or FNHI common stock may be traded at any future
time.
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The engagement letter between Chartered Capital Advisers and IDM provides
that, for its services, Chartered Capital Advisers is entitled to receive a
transaction fee equal to $25,000 payable $10,000 upon initial engagement,
$10,000 upon issuance of a draft of the opinion and $5,000 upon issuance of the
final opinion. IDM also agreed to reimburse Chartered Capital Advisers for
certain of its out-of-pocket expenses and to indemnify and hold harmless
Chartered Capital Advisers and its professionals against any and all losses,
claims, actions or damages, including reimbursement for reasonable attorneys
fees, arising from the engagement of Chartered Capital Advisers unless Chartered
Capital Advisers is found to be guilty of fraud or willful and gross negligence.
The terms of the fee arrangement with Chartered Capital Advisers, which IDM and
Chartered Capital Advisers believe are customary in transactions of this nature,
were negotiated at arm's length between IDM and Chartered Capital Advisers, and
the IDM board was aware of such fee arrangements. Except for the services and
fees described above, no relationship existed between IDM and Chartered Capital
Advisors during the past two fiscal years and no compensation was paid to
Chartered Capital Advisors by IDM nor is it expected that compensation will be
paid to Chartered Capital Advisors in the future.
Chartered Capital Advisers was retained based on its experience as a
financial advisor in connection with mergers and acquisitions and in securities
valuations generally
Chartered Capital Advisers is a recognized financial adviser which
regularly provides merger and acquisition, valuation, and corporate financial
advisory services on behalf of corporate clients, investors, financial
institutions, attorneys, accountants and participants in employee benefit plans.
Interests of Certain Persons in the Merger
Upon consummation of the merger, it is anticipated that the directors and
officers of Fusion Networks and their affiliates will beneficially own
approximately 22.4% of the then outstanding shares of FNHI common stock,
calculated on the basis set forth under the heading "Securities Ownership of
Certain Beneficial Owners and Management."
Under the merger agreement and the holding company reorganization, at the
consummation of the merger, each stock option, warrant or derivative security of
IDM which is outstanding and unexercised immediately prior to the effective time
of the merger, will be assumed by FNHI and converted into a FNHI stock option,
warrant or derivative security to purchase shares of Fusion Networks Holdings
common stock in the same number and at the same exercise price as prior to the
merger. Included in the terms of the merger agreement is a requirement that the
shareholders of IDM approve a 1,600,000 share increase in the number of shares
reserved for issuance under IDM's 1998 Stock Option Plan, which plan will be
assumed by FNHI, of which 500,000 options each had been granted to Frank Falco
and Joel Freedman, the principal officers of IDM. See "Description of FNHI
Capital Stock" for a description of the outstanding IDM stock options, warrants
and derivative securities and Fusion Networks stock options and warrants that
will become FNHI stock options upon consummation of the merger.
The merger agreement provides that Fusion Networks shall be entitled to
designate three individuals to the FNHI board of directors and IDM shall be
entitled to designate two individuals to be nominated and recommended for
election as directors, as the designees of IDM, for a period of not less than
five years, and each other director serving from the effective time of the
merger until their successors shall be duly elected and qualified. See "The
Merger - Operations Following the Merger."
The merger agreement also provides that the FNHI and Fusion Networks will
guarantee, for a period of three years, up to $50,000 of salary, each, payable
under existing employment agreements of Frank Falco and Joel Freedman with IDM.
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Material Federal Income Tax Considerations
The opinion of Friedman Siegelbaum LLP, tax counsel to IDM, as to the
material federal income tax considerations generally applicable to holders of
IDM Common Stock who, pursuant to the holding company reorganization, exchange
their IDM Common Stock solely for FNHI Common Stock, and the opinion of
Silverstein and Mullens, P.L.L.C., tax counsel to Fusion Networks, as to the
material federal income tax considerations generally applicable to holders of
Fusion Networks Common Stock who, pursuant to the merger, exchange their Fusion
Networks Common Stock solely for FNHI Common Stock, are set forth below.
Consummation of the merger is conditioned upon the receipt by IDM of an opinion
of Friedman Siegelbaum LLP, to the effect that, based upon customary assumptions
and representations principally relating to the stock ownership and assets of
FNHI and IDM and the continuation of the business of IDM, which representations
will be made by FNHI and IDM (the "Tax Representations"), for federal income tax
purposes, the holding company reorganization, in conjunction with the merger,
will be treated as a tax-free reorganization within the meaning of Section 368
of the Code. In connection with the merger, Fusion Networks has obtained an
opinion of Silverstein and Mullens, P.L.L.C., to the effect that, based upon the
Tax Representations, for federal income tax purposes relating to Fusion Networks
and its shareholders, the merger will be treated as a tax-free exchange within
the meaning of Section 351 of the Code.
The following discussion and opinions of Friedman Siegelbaum LLP and
Silverstein and Mullens, P.L.L.C. are based upon the Tax Representations,
current provisions of the Code, currently applicable Treasury regulations, and
judicial and administrative decisions and rulings. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view, and
no ruling from the IRS has been or will be sought. Future legislative, judicial
or administrative changes or interpretations could alter or modify the
statements and conclusions set forth herein, and any such changes or
interpretations could be retroactive and could affect the tax consequences to
the stockholders of IDM and Fusion Networks.
The following discussion and opinions of Friedman Siegelbaum LLP and
Silverstein and Mullens, P.L.L.C. do not purport to deal with all aspects of
federal income taxation that may affect particular stockholders in light of
their individual circumstances, and is not intended for stockholders subject to
special treatment under the federal income tax law (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign persons, stockholders who hold their stock as part of a hedge,
appreciated financial position, straddle or conversion transaction, stockholders
who do not hold their stock as capital assets and stockholders who have acquired
their stock upon the exercise of employee options or otherwise as compensation).
In addition, the discussion below and the opinions do not consider the effect of
any applicable state, local or foreign tax laws.
In the event that the opinion to be delivered by Friedman Siegelbaum LLP at
closing is materially different from the opinions and tax treatment described
below, IDM will resolicit its shareholders.
Treatment Of Holders Of IDM Common Stock. The opinion of Friedman
Siegelbaum LLP is that the holding company reorganization will qualify as a
tax-free reorganization under Section 368 of the Code and that a holder of IDM
Common Stock who, pursuant to the holding company reorganization, exchanges IDM
Common Stock for FNHI Common Stock, will not recognize gain or loss upon such
exchange. Such holder's tax basis in the FNHI Common Stock received pursuant to
the holding company reorganization will be equal to its tax basis in the IDM
Common Stock surrendered, and its holding period for the FNHI Common Stock will
include its holding period for the IDM Common Stock surrendered.
Exercise of IDM Dissenters' Rights. The opinion of Friedman Siegelbaum LLP
is that holders of IDM Common Stock who exercise their statutory dissenters'
rights will recognize gain or loss equal to the difference between their tax
basis in their IDM Common Stock and the amount of cash they receive in exchange
therefor or ordinary income equal to the amount of cash received.
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Treatment Of Holders Of Fusion Networks Common Stock. The opinion of
Silverstein and Mullens, P.L.L.C. is that the merger will qualify as a tax free
exchange under Section 351 of the Code and that a holder of Fusion Networks
Common Stock who, pursuant to the merger, exchanges Fusion Networks Common Stock
for FNHI Common Stock will not recognize gain or loss upon such exchange. Such
holder's tax basis in the FNHI Common Stock received pursuant to the merger will
be equal to its tax basis in the Fusion Networks Common Stock surrendered, and
its holding period for the FNHI Common Stock will include its holding period for
the Fusion Networks Common Stock surrendered.
Exercise of Fusion Networks Dissenters' Rights. The opinion of Silverstein
and Mullens, P.L.L.C. is that Fusion Networks shareholders (other than those who
own, or by operation of family or entity attribution are deemed to own, stock in
FNHI such that their actual or constructive ownership of FNHI stock does not
represent at least a meaningful reduction in the percentage ownership interest
in FNHI that they would have owned had they participated in the merger) who
exercise their statutory dissenters' rights will recognize gain or loss equal to
the difference between their tax basis in their Fusion Networks Common Stock and
the amount of cash they receive in exchange therefor.
Anticipated Accounting Treatment
The holding company reorganization and merger are expected to be accounted
for using the purchase method of accounting in accordance with generally
accepted accounting principles. Fusion Networks will be deemed the acquiror for
accounting and financial reporting purposes. Accordingly, future historical
financial statements of the combined entity, assuming consummation of the
transactions contemplated hereby, will be those of Fusion Networks prior to the
merger and include IDM only from the date of the merger. For purposes of
preparing future consolidated financial statements, a new accounting basis will
be established for IDM's respective tangible and intangible assets and
liabilities based upon their respective estimated fair values and the aggregate
purchase price, including the costs of the transaction. A final determination of
required purchase accounting adjustments and the fair value of IDM's assets and
liabilities has not yet been made. Accordingly, the purchase accounting
adjustments made in connection with the development of the unaudited pro forma
condensed consolidated financial statements appearing elsewhere in this Joint
Proxy Statement/Prospectus are preliminary and have been made solely for
purposes of developing such pro forma financial information to comply with
disclosure requirements of the Securities and Exchange Commission. See "Summary
Unaudited Pro Forma Combined Consolidated Financial Data."
Dissenters' Rights
IDM Common Stock. Under New Jersey law, unless the shares of FNHI to be
issued in the merger have been listed on a national securities exchange or are
held of record by not less than 1,000 holders, IDM stockholders will have the
right to an appraisal of the value of their shares in connection with the
holding company reorganization. Section 14A:11 of the New Jersey Business
Corporation Act entitles any IDM stockholder who objects to the holding company
reorganization who follows the procedures prescribed by Section 14A:11, in lieu
of receiving the consideration proposed under the holding company
reorganization, to receive cash equal to the "fair value" of such stockholder's
shares of IDM Common Stock. Set forth below is a summary of the material
procedures relating to the exercise of such dissenters' rights. This summary
does not purport to be a complete statement of dissenters' rights and is
qualified in its entirety by reference to Section 14A:11 of the NJBCA, which is
reproduced in full as Appendix L attached to this Joint Proxy
Statement/Prospectus.
Any IDM stockholder contemplating the possibility of dissenting from the
holding company reorganization should carefully review the text of Annex L
(particularly the specified procedural steps required to perfect the dissenters'
rights, which are complex) and should also consult such stockholder's legal
counsel. such rights will be lost if the procedural requirements of section
14a:11 of the NJBCA are not fully and precisely satisfied.
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The NJBCA provides dissenters' rights for any stockholder of IDM who
objects to the holding company reorganization who meets the requisite statutory
requirements contained in the NJBCA. Under the NJBCA, any IDM stockholder who
(i) files with IDM written notice of his or her intent to demand the fair value
of his or her shares of IDM Common Stock if the holding company reorganization
is consummated and becomes effective, which notice is filed with IDM before the
vote is taken at the IDM Special Meeting and (ii) does not vote his or her
shares of IDM Common Stock at the IDM Special Meeting in favor of the proposal
to approve the holding company reorganization, shall be entitled, if the holding
company reorganization is approved and effected, to receive a cash payment of
the fair value of such stockholder's shares of IDM Common Stock upon compliance
with the applicable statutory procedural requirements. A failure by any IDM
stockholder to vote against the proposal to approve the holding company
reorganization will not in and of itself constitute a waiver of the dissenters'
rights of such stockholder under the NJBCA. In addition, an IDM stockholder's
vote against the proposal to approve the holding company reorganization will not
satisfy the notice requirement referred to in clause (i) above.
Within 10 days after the holding company reorganization takes effect, IDM
must send by certified mail written notice of the effective date to all
stockholders who have given written notice of their intent to demand the fair
value of their shares of IDM Common Stock and not voted in favor of the holding
company reorganization as described above. The notice from IDM to the
stockholders, and each of the other notice required to be made by IDM under the
NJBCA, must set forth the dates prior to which action must be taken by
stockholders in order to perfect their rights as dissenting stockholders under
the NJBCA.
An IDM stockholder who is sent a notice and who wishes to assert
dissenters' rights must make written demand for payment of the fair value of the
shares within 20 days after the date such notice was mailed. Not later than 20
days after making such demand, the stockholder must submit to IDM the
certificate(s) (the "Certificates") representing the shares of IDM Common Stock
and IDM must affix a notation on the Certificates indicating that the shares
evidenced by the Certificates are subject to a demand for appraisal. Upon
affixing the notation, IDM must return the Certificates to the stockholders.
From and after making written demand for payment of the fair value of the
shares, dissenting stockholders will no longer be entitled to any rights of an
IDM stockholder, including, but not limited to, the right to receive notice of
meetings, to vote at any meetings or to receive dividends, and will only be
entitled to any rights to appraisal as provided by the NJBCA. If any such holder
of IDM Common Stock shall have failed to perfect or shall have effectively
withdrawn or lost such right, his or her shares of IDM Common Stock shall
thereupon be deemed to have been converted into the right to receive FNHI Common
Stock pursuant to the Plan of Reorganization and Merger.
Within 10 days after the expiration of the period within which dissenting
stockholders may make written demand to be paid the fair value of their shares,
IDM must mail to each dissenting stockholder certain financial statements. IDM
may accompany such mailing with a written offer to pay each dissenting
stockholder for his shares at a specified price deemed by IDM to be the fair
value of those shares. If, not later than 30 days after the expiration of the 10
day period for mailing financial statements, IDM and any dissenting stockholder
agree upon the fair value of the shares, payment for those shares shall be made
upon surrender of the Certificates.
If IDM and any dissenting stockholders are unable to agree upon the fair
value of the shares within the 30 day period provided, within 30 days after the
end of such period the dissenting stockholders may make written demand on IDM to
commence an action in the Superior Court of New Jersey to determine the fair
value of the shares. Within 30 days after the receipt of such demand, IDM must
commence the action in the New Jersey Court. If IDM fails to commence such
action within the time permitted, a dissenting stockholder may commence such a
cause of action in IDM's name within 60 days after expiration of the period
within which IDM was required to commence such action. In the event demand is
made on IDM by dissenting shareholders to commence an action to determine fair
market value, IDM intends to comply with such demand and to file the required
action.
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The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court shall determine whether the dissenting stockholder has complied with the
requirements of Section 14A:11 of the NJBCA and shall determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its
discretion, sees fit to use. The fair value of the shares as determined by the
court is binding on all dissenting stockholders, other than dissenting
stockholders who have previously agreed with IDM upon the fair value of the
shares, and may be less than, equal to or greater than the market price of the
FNHI Common Stock to be issued to non-dissenting stockholders for their shares
of IDM Common Stock if the holding company reorganization is completed. The
court's judgment shall include an allowance for interest at such rate as the
court finds to be equitable from the date of demand to the date of payment. If a
dissenting stockholder's refusal to accept an offer of payment from IDM was
arbitrary, vexatious or otherwise not in good faith, the court shall not allow
interest.
The costs and expenses of the court proceeding shall be determined by the
court and apportioned and assessed as the court deems to be equitable.
A dissenting stockholder may not withdraw his demand for payment of the
fair value of his shares without the written consent of IDM. The right of a
dissenting stockholder to be paid the fair value of his shares shall cease if
(a) he fails to present his Certificate as required for purposes of affixing the
mentioned notation, (b) he withdraws his demand with the consent of IDM, (c) no
agreement is reached on the fair value of the shares and an action in the New
Jersey Court is not commenced in the period prescribed, (d) the New Jersey Court
determines that he is not entitled to payment for his shares, (e) the holding
company reorganization is abandoned or rescinded, or (f) a court enjoins or sets
aside the holding company reorganization. In any such case, the rights of the
dissenting stockholder shall be reinstated as of the date of making demand and
the dissenting stockholder shall be entitled to any intervening preemptive
rights and the right to payment of any intervening dividends or other
distribution.
A stockholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right to
dissent exists.
Fusion Networks Common Stock. Unless the shares of FNHI to be issued in the
merger have been listed on a national securities exchange or on the Nasdaq
National Market or are held of record by more than 2,000 holders, the holders of
the Fusion Networks common stock who do not vote for the approval and adoption
of the merger agreement at the Fusion Networks Special Meeting and who otherwise
comply with the applicable statutory procedures of Section 262 of the Delaware
General Corporation Law summarized herein may be entitled to appraisal rights
under Section 262. In order to exercise and perfect appraisal rights, the record
holder of Fusion Networks common stock must follow the steps summarized below
properly and in a timely manner. A person having a beneficial interest in shares
of Fusion Networks common stock held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner to perfect
appraisal rights.
Section 262 of the DGCL is reprinted in its entirety as Appendix K to this
joint proxy statement/ prospectus. set forth below is a summary description of
Section 262. The following summary is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Appendix K. All references in Section 262 and this summary to "holder" are to
the record holder of the shares of fusion networks common stock immediately
prior to the effective time as to which appraisal rights are asserted. Failure
to comply strictly with the procedures set forth in Section 262 of the DGCL will
result in the loss of appraisal rights.
Under the DGCL, holders of Fusion Networks common stock who follow the
procedures set forth in Section 262 will be entitled to have their shares
appraised by the Delaware Court of Chancery and to receive payment in cash of
the "fair value" of such shares, exclusive of any element of value arising from
the accomplishment or expectation of the merger, together with a fair rate of
interest, if any, as determined by such court.
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Under Section 262, where a proposed merger is to be submitted for approval
at a meeting of stockholders, as in the case of the Fusion Networks Special
Meeting, the corporation, not less than 20 days prior to such meeting, must
notify each of its stockholders who was a stockholder on the record date with
respect to such shares for which appraisal rights are available, that appraisal
rights are so available, and must include in each such notice a copy of Section
262. This Joint Proxy Statement/Prospectus constitutes such notice to the
holders of Fusion Networks common stock and Section 262 of the DGCL is attached
to this Joint Proxy Statement/Prospectus as Appendix K. Any Holder who wishes to
exercise such appraisal rights or who wishes to preserve his right to do so
should review the following discussion and Appendix K carefully, because failure
to timely and properly comply with the procedures specified will result in the
loss of appraisal rights under the DGCL.
A Holder wishing to exercise appraisal rights (a) must not vote for the
approval and adoption of the merger agreement and (b) must deliver to Fusion
Networks, before the vote or the proposal to approve and adopt the merger
agreement, a written demand for appraisal of such holder's shares of Fusion
Networks common stock. A Holder who signs and returns a proxy card without
expressly directing that his or her shares of Fusion Networks common stock be
voted against the merger agreement will effectively waive his, her or its
appraisal rights because such shares represented by the proxy card will be voted
for the approval and adoption of the merger agreement. Accordingly, a Holder who
desires to exercise and perfect appraisal rights with respect to any of his or
her shares of Fusion Networks common stock must either (i) refrain from
executing and returning the enclosed proxy card and from voting in person in
favor of the proposal to approve the merger agreement, or (ii) check either the
"Against" or the "Abstain" box next to the proposal on such card or
affirmatively vote in person against the proposal or register in person an
abstention with respect thereto. A vote or proxy against the merger agreement
shall not, in and of itself, constitute a demand for appraisal.
A demand for appraisal will be sufficient if it reasonably informs Fusion
Networks of the identity of the Holder and that such Holder intends thereby to
demand appraisal of such Holder's shares of Fusion Networks common stock. This
written demand for appraisal must be separate from any proxy or vote abstaining
from or voting against the approval and adoption of the merger agreement. A
Holder wishing to exercise appraisal rights must be the record holder of such
shares of Fusion Networks common stock on the date the written demand for
appraisal is made and must continue to hold such shares through the Effective
Time. Accordingly, a Holder who is the record holder of shares of Fusion
Networks common stock on the date the written demand for appraisal is made, but
who thereafter transfers such shares prior to the Effective Time, will lose any
right to appraisal in respect of such shares.
Only a holder of record of shares of Fusion Networks common stock is
entitled to assert appraisal rights for the shares of Fusion Networks common
stock registered in that holder's name. A demand for appraisal should be
executed by or on behalf of the holder of record, fully and correctly, as the
holder's name appears on the stock certificates and must state that such person
intends thereby to demand appraisal of his, her or its shares of Fusion Networks
common stock. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, execution of the demand for appraisal
should be made in that capacity, and if the shares are owned of record by more
than one person, as in a joint tenancy or tenancy in common, the demand should
be executed by or on behalf of all joint owners. An authorized agent, including
one for two or more joint owners, may execute the demand for appraisal on behalf
of a holder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, he or she
is acting as agent for such owner or owners.
A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares of
Fusion Networks common stock held for one or more beneficial owners while not
exercising such rights with respect to the shares held for other beneficial
owners; in such case, the written demand should set forth the number of shares
as to which appraisal is sought. Where the number of shares of Fusion Networks
common stock is not expressly stated, the demand will be presumed to cover all
shares held in the name of the record owner. Holders who hold their shares in
brokerage accounts or other nominee form and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such nominee.
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All written demands for appraisal of shares must be mailed or delivered to:
Fusion Networks, Inc., 8115 N.W. 29th Street, Miami, Florida 33122, or should be
delivered to the secretary at the Fusion Networks special meeting, prior to the
vote on the merger agreement.
Within ten days after the Effective Time, Fusion Networks will notify each
Holder who properly asserted appraisal rights under Section 262 and has not
voted for the approval and adoption of the merger agreement as of the Effective
Time.
Within 120 days after the Effective Time, but not thereafter, Fusion
Networks or any Holder who has complied with the statutory requirements
summarized above may file a petition in the Delaware Court demanding a
determination of the fair value of the shares held by such Holder. If no such
petition is filed, appraisal rights will be lost for all Holders who had
previously demanded appraisal of their shares. Fusion Networks is not under any
obligation, and has no present intention, to file a petition with respect to
appraisal of the value of the shares. Accordingly, Holders who wish to exercise
their appraisal rights should regard it as their obligation to take all steps
necessary to perfect their appraisal rights in the manner prescribed in Section
262.
Within 120 days after the Effective Time, any Holder who has complied with
the provisions of Section 262 will be entitled, upon written request, to receive
from Fusion Networks a statement setting forth the aggregate number of shares of
Fusion Networks common stock not voted in favor of the approval and adoption of
the merger agreement and with respect to which demands for appraisal were
received by Fusion Networks, and the number of holders of such shares. Such
statement must be mailed within ten days after the written request therefore has
been received by Fusion Networks.
If a petition for an appraisal is timely filed and a copy thereof served
upon Fusion Networks, Fusion Networks will then be obligated within 20 days to
file with the Delaware Register in Chancery a duly verified list containing the
names and addresses of the Holders who have demanded appraisal of their shares
and with whom agreements as to the value of their shares have not been reached.
After notice to the Holders as required by the Delaware Court, the Delaware
Court is empowered to conduct a hearing on such petition to determine those
Holders who have complied with Section 262 and who have become entitled to
appraisal rights thereunder. The Delaware Court may require the Holders who
demanded appraisal rights of their shares of Fusion Networks common stock to
submit their stock certificates to the Register in Chancery for notation thereon
of the pendency of the appraisal proceeding; and if any Holder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
Holder.
After determining which Holders are entitled to appraisal, the Delaware
Court will appraise the "fair value" of their shares of Fusion Networks common
stock, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Holders considering
seeking appraisal should be aware that the fair value of their shares as
determined under Section 262 could be more than, the same as or less than the
consideration they are entitled to receive pursuant to the merger agreement if
they did not seek appraisal of their shares and that investment banking opinions
as to fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262. In determining "fair value" of shares, the
Delaware Court shall take into account all relevant factors. In Weinberger v.
UOP, Inc., the Delaware Supreme Court has stated that such factors include
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which could be ascertained as
of the date of the merger which throw any light on future prospects of the
merged corporation." In Weinberger, the Delaware Supreme Court stated, among
other things, that "proof of value by any techniques or methods generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in an appraisal proceeding. In addition, the
Delaware Court has decided that the statutory appraisal remedy, depending on
factual circumstances, may or may not be a dissenter's exclusive remedy.
The Delaware Court will also determine the amount of interest, if any, to
be paid on the amounts to be received by persons whose shares of Fusion Networks
common stock have been appraised. The costs of the action may be determined by
the Delaware Court and taxed upon the parties as the Delaware Court deems
equitable. The Delaware Court may also order that all or a portion of the
expenses incurred by any Holder in connection with an appraisal, including
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the shares entitled to appraisal. In the absence of such
determination or assessment, each party bears its own expenses.
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Any Holder who has duly demanded and perfected an appraisal in compliance
with Section 262 will not, after the Effective Time, be entitled to vote his or
her shares for any purpose or be entitled to the payment of dividends or other
distributions thereon, except dividends or other distributions payable to
holders of record of shares of Fusion Networks common stock as of a date prior
to the Effective Time.
At any time within 60 days after the Effective Time, any Holder will have
the right to withdraw his or her demand for appraisal and to accept the merger
consideration. After this period, a Holder may withdraw his or her demand for
appraisal only with the written consent of Fusion Networks. If no petition for
appraisal is filed with the Delaware Court within 120 days after the Effective
Time, a Holder's right to appraisal will cease and he or she will be entitled to
receive the merger consideration, without interest, as if he or she had not
demanded appraisal of his or her shares. No petition timely filed in the
Delaware Court demanding appraisal will be dismissed as to any Holder without
the approval of the Delaware Court, and such approval may be conditioned on such
terms as the Delaware Court deems just.
If any Holder who properly demands appraisal of his or her shares of Fusion
Networks common stock under Section 262 fails to perfect, or effectively
withdraws or loses, his right to appraisal, as provided in the DGCL, the shares
of such Holder will be converted into the right to receive the consideration
receivable with respect to such shares in accordance with the merger agreement.
A Holder will fail to perfect, or effectively lose or withdraw, his right to
appraisal if, among other things, no petition for appraisal is filed within 120
days after the Effective Time, or if the Holder delivers to Fusion Networks a
written withdrawal of his demand for appraisal. Any such attempt to withdraw an
appraisal demand more than 60 days after the Effective Time will require the
written approval of Fusion Networks.
Holders desiring to exercise their appraisal rights must not vote for the
approval and adoption of the merger agreement and must strictly comply with the
procedures set forth in section 262 of the DGCL.
Failure to take any required step in connection with the exercise of
appraisal rights will result in the termination or waiver of such rights.
Listing of Common Stock to be Issued in the Merger
IDM's common stock is listed on the Nasdaq SmallCap Market under the symbol
"IDMC". Upon consummation of the merger, IDM common stock will be delistd from
Nasdaq and deregistered under the Exchange Act. Fusion Networks' common stock is
not presently publicly traded. FNHI has filed an application with the Nasdaq
National Market for the listing of the shares of FNHI common stock to be issued
in the merger and the shares of FNHI common stock to be reserved for issuance in
connection with the assumption of outstanding IDM stock options and warrants and
outstanding Fusion Networks stock options and warrants.
Restrictions on Sale of Shares By Affiliates of IDM and Fusion Networks
The shares of FNHI common stock to be issued in connection with the merger
will be registered under the Securities Act and will be freely transferable
under the Securities Act, except for shares of FNHI common stock issued to any
person who is deemed to be an affiliate of either IDM or Fusion Networks at the
time of the special meetings. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control of either IDM or Fusion Networks and may include some of the officers,
directors, or principal stockholders of IDM or Fusion Networks. Affiliates may
not sell their shares of FNHI common stock acquired in connection with the
merger except pursuant to:
. an effective registration statement under the Securities Act covering the
resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act; or
. another applicable exemption under the Securities Act.
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Operations Following the Merger
Following the merger, IDM will operate as a wholly owned subsidiary of the
FNHI and Fusion Networks will operate as a wholly owned subsidiary of the FNHI.
Both IDM and Fusion Networks will continue to pursue their respective businesses
in a manner consistent with their operations prior to the merger. Upon
consummation of the merger, it is anticipated that the boards of directors and
management of IDM and Fusion Networks will remain unchanged. IDM and Fusion
Networks have agreed that Fusion Networks shall be entitled to designate three
members of the FNHI board of directors and that Frank Falco and Joel Freedman
shall be nominated, as designees of IDM, to fill two board positions. The
stockholders of IDM and Fusion Networks will each become stockholders of FNHI,
and their rights as stockholders will be governed by FNHI's certificate of
incorporation and bylaws and the laws of the State of Delaware. Hernando
Bahamon, Chairman, Chief Executive Officer and President of Fusion Networks,
Enrique Bahamon, Chief Financial Officer of Fusion Networks, and Felipe Santos,
a Director of Fusion Networks, have been designated as Fusion Networks' nominees
to the board of FNHI. Traci Hammes, a Director of Fusion Networks, and Jeremy
Barbera, Chairman and Chief Executive Officer of Marketing Services Group, Inc.
have been designated as additional board members. Hernando Bahamon will assume
the position of President and Chief Executive Officer, and Enrique Bahamon will
assume the position of Chief Financial Officer, of FNHI following the merger.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following is a brief summary of the material provisions of the plan of
reorganization and merger, the merger agreement and each amendment to the merger
agreement, copies of which are attached as Appendix A, B, C, D, E and F to this
joint proxy statement/prospectus and incorporated herein by reference. We urge
you to read the plan of reorganization and merger, the merger agreement and the
amendments to the merger agreement in their entirety for a more complete
description of the merger and holding company reorganization.
The Holding Company Reorganization
The holding company reorganization will be carried out pursuant to the
terms of the Plan of Reorganization and Merger. Under the terms of the Plan of
Reorganization and Merger, IDM Merger Subsidiary, a Delaware corporation and a
wholly-owned subsidiary of FNHI, will merge with and into IDM. Following the
holding company reorganization, IDM will be a wholly-owned subsidiary of FNHI.
The holding company reorganization will take place following approval and
adoption of the Plan of Reorganization and Merger by the IDM stockholders.
The Merger
The merger will be carried out pursuant to the terms of an Agreement and
Plan of Merger, as amended. Under the terms of the Agreement and Plan of Merger,
as amended, IDM/FNI Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of FNHI, will merge with and into Fusion Networks.
Following the merger, Fusion Networks will be a wholly-owned subsidiary of FNHI.
The merger will take place following approval and adoption of the merger by the
IDM stockholders and the Fusion Networks stockholders and the satisfaction or
waiver of the other conditions of the merger.
Effective Time
At the closing of the merger, the parties will cause the holding company
reorganization and merger to become effective by filing certificates of merger
with the Secretary of State of the State of Delaware and the Secretary of State
of the State of New Jersey. IDM and Fusion Networks are working toward
completing the merger as soon as possible and hope to complete the merger during
the first quarter of 2000. Because the merger is subject to a number of
conditions, however, we cannot predict the exact timing. If the merger is not
consummated by March 31, 2000, the merger agreement terminates unless either
party elects to extend the merger agreement in which case the merger agreement
may be extended to not later than June 30, 2000.
Conversion of Stock; Treatment of Options, Warrants and Derivative Securities
At the effective time, each outstanding share of IDM common stock will
automatically be converted into the right to receive one share of FNHI common
stock and each outstanding share of Fusion Networks common stock will
automatically be converted into one share of FNHI common stock. The number of
shares of FNHI common stock issuable in the merger and holding company
reorganization will be proportionately adjusted as appropriate for any stock
split, stock dividend or similar event with respect to IDM common stock or
Fusion Networks common stock effected between the date of this joint proxy
statement/prospectus and the completion of the merger. No fractional shares of
FNHI common stock will be issued in the merger.
Each stock option, warrant and derivative security to acquire common stock
of IDM outstanding and unexercised immediately prior to the effective time will
be converted automatically at the effective time into, and will become, a stock
option, warrant or derivative security to purchase common stock of FNHI and will
continue to be governed by the terms established by IDM. Each stock option plan
of IDM will be assumed by FNHI. The parties intend for the IDM stock options
assumed by FNHI to qualify as incentive stock options to the extent the stock
options qualified as incentive stock options prior to the effective time.
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Each stock option, warrant and derivative security to acquire common stock
of Fusion Networks outstanding unexercised immediately prior to the effective
time will be converted automatically at the effective time into, and will
become, a stock option, warrant or derivative security to purchase common stock
of FNHI and will continue to be governed by the terms established by Fusion
Networks. In each case, the number of shares of FNHI common stock subject to
such options, warrants or derivative securities, and the exercise price or
conversion price thereof, shall be adjusted proportionately to reflect to the
conversion ratio of the Fusion Networks common stock.
Exchange of Stock Certificates
IDM's transfer agent, Continental Stock Transfer & Trust Co., will act as
exchange agent in connection with the holding company reorganization and merger.
Promptly after the effective time, the exchange agent will mail to IDM
stockholders and Fusion Networks stockholders a letter of transmittal and
instructions for surrendering their IDM stock certificates and Fusion Networks
stock certificates in exchange for FNHI stock certificates.
IDM stockholders and Fusion Networks stockholders should not submit their
stock certificates for exchange until they have received the letter of
transmittal and instructions referred to above.
Representations and Warranties
Fusion Networks and FNHI each made a number of customary representations
and warranties in the merger agreement about their authority to enter into the
merger agreement and to consummate the other transactions contemplated by the
merger agreement and about aspects of their business, financial condition,
structure and other facts pertinent to the merger, including, among others: (1)
due organization, qualification to do business and good standing of each of
Fusion Networks and FNHI; (2) capital structure of each of Fusion Networks and
FNHI; (3) the authorization, execution, delivery and enforceability of the
merger agreement and related documents, the consummation of the transactions
contemplated by the merger agreement and related documents; (4) conflicts under
charters or bylaws, required consents or approvals and violations of any
instruments or law; (5) documents and financial statements filed with the SEC or
provided and the accuracy of information contained therein; (6) the absence of
undisclosed liabilities; (7) the absence of certain material adverse events or
changes; (8) litigation; (9) labor matters; (10) tax matters; (11) material
contracts; and (12) intellectual property.
The representations and warranties in the merger agreement are complicated
and not easily summarized. We urge stockholders to read carefully the articles
in the merger agreement entitled "Representations and Warranties of Fusion" and
"Representations and Warranties of Parent and Subsidiary."
Certain Covenants
Conduct of Business. Pursuant to the merger agreement, Fusion Networks has
agreed that, during the period from the date of the merger agreement until the
effective time, except as contemplated by the merger agreement, it and each of
its respective subsidiaries will conduct its operations in the ordinary and
usual course of business consistent with its business plan and seek to preserve
intact its current business organizations, seek to keep available the service of
its current officers and employees and seek to preserve its relationships with
customers, suppliers and others having business dealings with. Fusion further
agreed that prior to the effective time, it and its subsidiaries would not,
without the prior written consent of FNHI: (a) amend its certificate of
incorporation or bylaws; (b) authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver any stock of any class or any other
securities convertible into or exchangeable for any stock or any equity
equivalents except as specifically contemplated by Fusion Networks' business
plan; (c) split, combine or reclassify any shares of its capital stock; declare,
set aside or pay any dividend or other distribution in respect of its capital
stock; make any other actual, constructive or deemed distribution in respect of
any shares of its capital stock or otherwise make any payments to stockholders
in their capacity as such; or redeem, repurchase or otherwise acquire any of its
securities or any securities of any of its subsidiaries; (d) adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of Fusion Networks or
any of its subsidiaries; (e) alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or ownership of
any subsidiary; (f) incur or assume any long-term or short-term debt or issue
any debt securities, except for borrowings under existing lines of credit in the
ordinary and usual course of business consistent with past
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practice; assume, guarantee, endorse or otherwise become liable or responsible
for the obligations of any other person, except in the ordinary and usual course
of business consistent with the business plan and in amounts not material to
Fusion Networks and its subsidiaries, taken as a whole, and except for
obligations of the wholly owned subsidiaries of Fusion Networks; make any loans,
advances or capital contributions to, or investments in, any other person (other
than to the wholly owned subsidiaries of Fusion Networks or customary loans or
advances to employees in the ordinary and usual course of business consistent
with the business plan and in amounts not material to the maker of such loan or
advance); pledge or otherwise encumber shares of capital stock of Fusion
Networks or its subsidiaries; or mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to be created any material lien
thereupon; (g) except as may be required by law, enter into, adopt, amend,
extend or terminate any bonus, profit sharing, compensation, severance,
termination, stock option, stock appreciation right, restricted stock,
performance unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, labor, collective bargaining, employment,
severance or other employee benefit agreement, trust, plan, fund, award or other
arrangement for the benefit or welfare of any director, officer or employee in
any manner, or increase in any manner the compensation or fringe benefits of any
director, officer or (except as required under agreements existing on the date
of the merger agreement and except for increases in compensation, bonus or other
benefits payable to employees of Fusion Networks or any of its subsidiaries in
the ordinary and usual course of business consistent with the business plan)
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date hereof; (h) acquire, sell, lease or dispose of any assets
outside the ordinary and usual course of business consistent with the business
plan or any assets which in the aggregate are material to Fusion Networks and
its subsidiaries taken as a whole, enter into any commitment or transaction
outside the ordinary and usual course of business consistent with the business
plan or grant any exclusive distribution rights; (i) except as may be required
as a result of a change in law or in generally accepted accounting principles,
change any of the accounting principles or practices used by it; (j) revalue in
any material respect any of its assets, including, without limitation, writing
down the value of inventory or writing-off notes or accounts receivable other
than in the ordinary and usual course of business consistent with business plan
or as required by GAAP; (k) acquire any corporation, partnership or other
business organization or division thereof or any equity interest therein; enter
into any material contract or agreement, other than in the ordinary and usual
course of business consistent with the business plan or amend in any material
respect any of the material contracts or the agreements of Fusion Networks; or
enter into or amend any contract, agreement, commitment or arrangement providing
for the taking of any action that would be prohibited under the merger
agreement; (l) make or revoke any tax election, or settle or compromise any tax
liability in excess of amounts reserved therefor on the consolidated balance
sheet of Fusion Networks as at the audit date, or change (or make a request to
any taxing authority to change) any aspect of its method of accounting for tax
purposes; (m) pay, discharge or satisfy any material claims, liabilities or
obligations, other than the payment, discharge or satisfaction in the ordinary
and usual course of business consistent with the business plan; (n) waive the
benefits of, or agree to modify in any manner, any confidentiality, standstill
or similar agreement to which Fusion Networks or any of its subsidiaries is a
party; (o) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated by the merger agreement; (p) take any
action that would prevent or impede the merger from qualifying as a
reorganization under Section 368(a) of the Internal Revenue Code; (q) enter into
any agreement or arrangement that limits or otherwise restricts Fusion Networks
or any of its subsidiaries or any successor thereto or that could, after the
effective time, limit or restrict FNHI and its affiliates or any successor
thereto, from engaging or competing in any line of business or in any geographic
area; (r) take, propose to take, or agree in writing or otherwise to take, any
actions which would make any of the representations or warranties of Fusion
Networks contained in the merger agreement untrue or incorrect in any material
respect or result in any of the conditions to the merger not being satisfied.
Pursuant to the merger agreement, FNHI and IDM have agreed that, during the
period from the date of the merger agreement until the effective time, except as
contemplated by the merger agreement, it and each of its respective subsidiaries
will not, without the prior written consent of Fusion Networks: (a) amend its
certificate of incorporation in any manner that would be materially adverse to
the holders of Fusion Networks common stock; (b) authorize for issuance, issue,
sell, deliver or agree or commit to issue, sell or deliver any stock of any
class or any other securities convertible into or exchangeable for any stock or
any equity equivalents; (c) declare, set aside or pay any dividend or other
distribution in respect of its capital stock; make any other actual,
constructive or deemed distribution in respect of any shares of its capital
stock or otherwise make any payments to stockholders in their capacity as such;
or redeem, repurchase or otherwise acquire any shares of Fusion Networks common
stock; (d) take
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any action that would prevent or impede the merger from qualifying as a
reorganization under Section 368(a) of the Internal Revenue Code; or (e) take,
propose to take, or agree in writing or otherwise to take, any action which
would make the representations or warranties of FNHI untrue or incorrect or
result in any of the conditions to the merger not being satisfied.
No Solicitation. The merger agreement provides that, from the date of the
merger agreement until the termination thereof, Fusion Networks will not, nor
will it permit any of its subsidiaries to, nor will it authorize or permit any
officer, director or employee of or any investment banker, attorney, accountant
or other advisor or representative of, Fusion Networks or any of its
subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage the
submission of any acquisition proposal, (ii) participate in any discussions or
negotiations regarding, or furnish to any person any non-public information with
respect to Fusion Networks or any of its subsidiaries, or take any other action
to facilitate, any acquisition proposal or any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
acquisition proposal or (iii) enter into any agreement with respect to an
acquisition proposal.
Special Meetings. The merger agreement provides that each of Fusion
Networks and IDM will call a meeting of its respective stockholders to be held
as promptly as practicable for the purpose of voting upon the merger agreement
and the merger. Each of Fusion Networks and IDM agreed to recommend to its
respective stockholders adoption of the merger agreement and approval of such
matters. Each party agreed to use all reasonable efforts to solicit from
stockholders of such party proxies in favor of such matters.
Registration of Securities. The merger agreement provides that, as soon as
practicable after the date thereof, FNHI shall file with the Securities and
Exchange Commission a registration statement on Form S-4, or such other form as
may be appropriate for the purpose of registering the FNHI common stock to be
issued to the Fusion Networks stockholders pursuant to the merger and seeking
proxies in connection with the vote of the stockholders of IDM with respect to
certain other items. The merger agreement also provides that (a) FNHI shall use
all reasonable efforts to cause the Registration Statement to become effective
as soon as possible; (b) prior to filing, FNHI shall consult with Fusion
Networks and provide Fusion Networks with a full opportunity to review and
comment on all portions of the registration statement; and (c) Fusion Networks
shall cooperate with FNHI and its counsel in the preparation of the registration
statement and provide all information and documents reasonably requested,
including financial statements as shall be required, in connection with
preparation of such registration statement.
Amendments to Certificate of Incorporation and Stock Option Plan. The
merger agreement provides that IDM and FNHI's boards of directors shall approve,
and submit to stockholders for approval, proposals to (a) amend the certificate
of incorporation of FNHI to increased the number of shares of authorized common
stock to 100,000,000 and decrease the par value of those shares to $.00001 per
share; (b) amend the certificate of incorporation of FNHI to change the name of
that company from its original name of IDM/Fusion Holdings, Inc. to Fusion
Networks Holdings, Inc.; and (c) amend the IDM 1998 Stock Option Plan to
increase the number of shares reserved for issuance under that plan by 1,600,000
shares. As permitted by the amended merger agreement, the amendments to the
certificate of incorporation of FNHI were carried out by IDM as sole stockholder
of FNHI in September 1999 and such amendments are not being submitted to the IDM
stockholders for vote.
Undertakings Regarding IDM. Pursuant to the merger agreement, Fusion
Networks and FNHI agreed to (a) guarantee, for a period of three years following
the effective time, the salary of Joel Freedman and Frank Falco, pursuant to
their existing employment agreements with IDM, in the amount of $50,000 per year
each; (b) cause fifty percent of all proceeds received from the conversion or
exercise of options or warrants of IDM or FNHI outstanding at the effective time
to be contributed to the capital of IDM with the balance to be contributed to
the capital of Fusion Networks; and (c) nominate and recommend the election of
Joel Freedman and Frank Falco to the board of FNHI for a minimum of five years.
Pursuant to the merger agreement, FNHI's board of directors was authorized
to grant additional options in the full amount reserved for issuance under each
of IDM's stock option plans and to issue up to 350,000 shares of common stock in
payment of amounts owed by IDM to various consultants and service providers.
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Board of Directors and Post-Merger Management. The merger agreement
provides that the board of directors of FNHI, following the effective time,
shall be comprised of six persons, three of which shall be designated by Fusion
Networks and two of which shall be designated by IDM.
With respect to management of IDM and Fusion Networks, the merger agreement
provides that the officers and directors serving prior to the effective time
will continue to serve in such capacities following the effective time. The
Chief Executive Officer and Chief Financial Officer of Fusion Networks will
assume the same positions with FNHI following the merger. See "The Merger -
Operations Following the Merger."
Stock Plans. At the Effective Time, each IDM stock option and each Fusion
Networks stock option, whether vested or unvested, will be deemed to constitute
an option to acquire, on the same terms and conditions as were applicable under
such IDM stock option and Fusion Networks stock option, as the case may be, the
same number of shares of FNHI common stock as the holder of such IDM stock
option and Fusion Networks stock option would have been entitled to receive
pursuant to the merger had such holder exercised such option in full immediately
prior to the effective time. The exercise price per share of each such option
will be equal to (x) the aggregate exercise price for the shares of IDM common
stock or Fusion Networks common stock, as the case may be, purchasable pursuant
to such IDM stock options or Fusion Networks stock options, as the case may be,
immediately prior to the effective time divided by (y) the number of full shares
of FNHI common stock deemed purchasable pursuant to such IDM stock options or
Fusion Networks stock options, as the case may be, in accordance with the
foregoing.
Pursuant to the merger agreement, FNHI has agreed to reserve for issuance a
sufficient number of shares of FNHI common stock for delivery upon exercise of
the IDM stock options and Fusion Networks stock options assumed as described
above. As soon as practicable after the effective time, FNHI will file a
registration statement on Form S-8 with respect to the shares of FNHI common
stock subject to such options and will use its best efforts to maintain the
effectiveness of such registration statement for so long as such options remain
outstanding.
Warrants and Derivative Securities. The merger agreement provides that, at
the effective time, each outstanding warrant or derivative security to purchase
IDM common stock or Fusion Networks common stock will thereafter solely
represent the right to acquire, on the same terms and conditions as are
currently applicable under such warrants or derivative securities, the same
number of shares of FNHI common stock as a holder of the warrants or derivative
securities would have been entitled to receive pursuant to the merger, as the
case may be, had such holder exercised the warrants or derivative securities in
full immediately prior to the effective time, at the price per share (rounded
downward to the nearest whole cent) equal to (x) the aggregate exercise price
for the shares of IDM common stock or the Fusion Networks common stock, as the
case may be, purchasable pursuant to the warrants or derivative securities
immediately prior to the effective time divided by (y) the number of full shares
of FNHI common stock deemed purchasable pursuant to the warrants in accordance
with the foregoing. At the effective time, FNHI will agree to issue any required
shares of FNHI common stock upon exercise of the warrants or derivative
securities in accordance with the foregoing.
Indemnification. The merger agreement provides that each of Fusion Networks
and FNHI will jointly and severally agree to indemnify the other, and their
respective officers, directors, employees, attorneys and agents and hold them
harmless against and in respect of (i) any and all loss, liability or damage
suffered or incurred by the indemnitee by reason of any untrue representation,
breach of warranty or non-fulfillment of any covenant by the indemnitor; and
(ii) any and all actions, suits, proceedings, claims, demands, assessments,
judgments, costs and expenses, including, without limitation, legal fees and
expenses, incident to any of the foregoing or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnity.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling FNHI pursuant to
the foregoing provisions, FNHI has been informed that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
Other Covenants. Pursuant to the Merger Agreement, each of Fusion Networks
and IDM has also agreed: (a) upon obtaining knowledge of any of the following,
to give prompt notice to the other of (i) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in the merger agreement, which is qualified
as to materiality, to be untrue or inaccurate, or any representation or warranty
not so qualified, to be untrue or inaccurate in any material respect at or prior
to the effective time, (ii) any material failure of Fusion Networks or FNHI, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder, (iii) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any condition to the obligations of any party to the effect of
the transactions contemplated hereby not to be satisfied, (iv) any notice of, or
other communication relating to, a default or event which, with notice or lapse
of time or both, would become a default, received by it or any of its
subsidiaries subsequent to the date of the merger agreement and prior to the
effective time, under any contract or agreement material to the financial
condition, properties, businesses, results of operations or prospects of it and
its subsidiaries taken as a whole to which it or any of its subsidiaries is a
party or is subject, (v) any notice or other communication from any governmental
entity in connection with the merger, (vi) any actions, suits, claims,
investigations or other proceedings (or communications indicating that the same
may be contemplated) commenced or threatened against Fusion Networks or any of
its subsidiaries which would have been required to have been disclosed pursuant
to the merger agreement or which relate to the consummation of the merger, (vii)
any notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated by the merger agreement, or (viii) any material adverse effect in
their respective financial condition, properties, businesses, results of
operations or prospects, taken as a whole; (b) to consult with one another
before issuing any press release or otherwise making any public statements with
respect to the transactions contemplated by the merger agreement, including,
without limitation, the merger, and to not issue any such press release or make
any such public statement prior to such consultation, except as may be required
by applicable law or by obligations pursuant to any listing agreement with the
Nasdaq SmallCap Market, as determined by FNHI or Fusion Networks, as the case
may be; (c) to execute and deliver to special tax counsel to FNHI certificates
substantially in the forms agreed to as reasonably requested by such law firm in
connection with the delivery of an opinion with respect to the transactions
contemplated by the merger agreement, and to take no action or cause to be taken
any action which would cause to be untrue any of the representations in such
certificates; (d) to cause the obligations of Fusion Networks or any of its
subsidiaries under the provisions of all employment, consulting, termination,
severance, change in control and indemnification agreements to be honored; (e)
IDM shall furnish to Fusion Networks copies of all reports, proxy statements and
prospectuses which it files with the SEC on or after the date of the merger
agreement, and represented and warranted that as of the respective dates
thereof, such reports will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and the
unaudited consolidated interim financial statements included in such reports
(including any related notes and schedules) will fairly present the financial
position of IDM and its consolidated subsidiaries as of the dates thereof and
the results of operations and cash flows or other information included therein
for the periods or as of the date then ended (subject, in the case of the
interim financial statements, to normal, recurring year-end adjustments), in
each case in accordance with past practice and GAAP consistently applied during
the periods involved (except as otherwise disclosed in the notes thereto); (f)
IDM shall use its best efforts to cause the shares of FNHI common stock to be
issued in connection with the merger to be approved for listing on the Nasdaq
SmallCap Market on or prior to the effective date, subject to official notice of
issuance; (g) if any takeover statute is or may become applicable to the merger,
each of IDM and Fusion Networks shall take such actions as are necessary so that
the transactions contemplated by the merger agreement may be consummated as
promptly as practicable on the terms contemplated thereby and otherwise act to
eliminate or minimize the effects of any takeover statute on the merger; and (h)
to give (and to cause their respective subsidiaries to give) the other such
party and its representatives access to all its personnel, properties, books,
contracts, commitments and records, and to furnish related information
reasonably requested by the other.
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Conditions to Completion of the Merger
IDM's and Fusion Networks' respective obligations to complete the merger
and the related transactions are subject to approval of the merger agreement and
the merger by Fusion Networks' stockholders and the approval of the holding
company reorganization, the merger and the amendment to IDM 1998 Stock Option
Plan by IDM's stockholders, as well as the prior satisfaction or waiver (if
permitted by applicable law) of each of the following conditions before
completion of the merger: (a) there shall not be in effect any law of any
governmental entity of competent jurisdiction, restraining, enjoining or
otherwise preventing consummation of the transactions contemplated by the merger
agreement or permitting such consummation only subject to any condition or
restriction that has or would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on Fusion Networks or FNHI and no
governmental entity shall have instituted any proceeding which continues to be
pending seeking any such Law; and (b) all necessary approvals under state
securities laws or the Securities Act or Exchange Act relating to the issuance
or trading of the FNHI common stock shall have been received.
The obligations of IDM and FNHI to consummate the transactions contemplated
by the merger agreement are subject to the fulfillment at or prior to the
effective time of each of the following additional conditions, any or all of
which may be waived in whole or part by IDM and FNHI, as the case may be, to the
extent permitted by applicable law except as otherwise noted: (a) the
representations and warranties of Fusion Networks contained in the merger
agreement or otherwise required to be made after the date of the merger
agreement in a writing expressly referred to therein by or on behalf of Fusion
Networks pursuant to the merger agreement, to the extent qualified by
materiality or material adverse effect, shall have been true and, to the extent
not qualified by materiality or material adverse effect, shall have been true in
all material respects, in each case when made and on and as of the effective
date as though made on and as of the effective date (except for representations
and warranties made as of a specified date, which need be true, or true in all
material respects, as the case may be, only as of the specified date); (b)
Fusion Networks shall have performed or complied in all material respects with
all agreements and conditions contained in the merger agreement required to be
performed or complied with by it prior to or at the effective time; (c) Fusion
Networks shall have delivered to FNHI a certificate, dated the effective date,
signed by the President or any Vice President of Fusion Holdings (but without
personal liability thereto), certifying as to the fulfillment of the conditions
specified above; (d) FNHI shall have received an opinion of special tax counsel,
dated the effective time, based on the representations of FNHI, IDM and Fusion
Networks to the effect that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code which condition cannot be waived; (e) (i) all
authorizations, consents or approvals of a governmental entity required in
connection with the execution and delivery of the merger agreement and the
performance of the obligations thereunder shall have been made or obtained,
without any limitation, restriction or condition that has or would reasonably be
expected to have, individually or in the aggregate, a material adverse effect on
Fusion Networks or FNHI, except for such authorizations, consents or approvals,
the failure of which to have been made or obtained does not and would not
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on Fusion Networks or FNHI, (ii) there shall not be pending or
threatened by any governmental entity any suit, action or proceeding (A) seeking
to restrain or prohibit the consummation of the merger or any of the other
transactions contemplated by the merger agreement or seeking to obtain from
Fusion Networks or FNHI any damages that are material in relation to Fusion
Networks and its subsidiaries taken as a whole or FNHI and its subsidiaries
taken as a whole, as applicable, (B) seeking to (1) prohibit or limit the
ownership or operation by Fusion Networks, FNHI or any of their respective
subsidiaries of any material portion of the business or assets of Fusion
Networks and its subsidiaries, taken as a whole, or FNHI and its subsidiaries,
taken as a whole, as applicable, (2) compel Fusion Networks, FNHI or any of
their respective subsidiaries to dispose of or "hold separate" any material
portion of the business or assets of Fusion Networks and its subsidiaries, taken
as a whole, or FNHI and its subsidiaries, taken as a whole, as applicable, as a
result of the merger or any of the other transactions contemplated by the merger
agreement or (3) impose any other significant restrictions upon, or the making
of any material accommodation (financial or otherwise) in respect of, the
transactions contemplated thereby or the conduct of the business of Fusion
Networks or FNHI (including any agreement not to compete in any geographic area
or line of business), (C) seeking to impose limitations on the ability of FNHI
to acquire or hold, or exercise full rights of ownership of, any shares of
capital stock of Fusion Networks, including the right to vote the common stock
of Fusion Networks, on all matters properly presented to the stockholders of
Fusion Networks, (D) seeking to prohibit FNHI and its subsidiaries from
effectively controlling in any material respect the business or operations of
Fusion Networks and its subsidiaries, taken as a whole, (E) which would result
in the abrogation or diminishment of any authority or license granted by any
governmental entity or (F)
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which otherwise could reasonably be expected to have a material adverse effect
on Fusion Networks or FNHI; (e) Fusion Networks shall have obtained the consent
or approval of each person whose consent or approval shall be required under any
material contract, real property lease or other obligation to which Fusion
Networks or any of its subsidiaries is a party, except those for which the
failure to obtain such consents or approvals does not or would not reasonably be
expected to have, individually or in the aggregate, a material adverse effect on
Fusion Networks and would not prevent or materially impair the ability of Fusion
Networks to consummate the transactions contemplated by the merger agreement;
and (f) the board of directors of IDM shall have received an opinion of
Chartered Capital Advisers, dated the date of the merger agreement, to the
effect that, as of such date, the terms of the merger are fair to IDM and its
stockholders from a financial point of view and, as of the effective date, such
opinion has not been withdrawn or modified in a manner adverse to IDM.
The obligations of Fusion Networks to consummate the transactions
contemplated by the merger agreement are subject to the fulfillment at or prior
to the effective time of each of the following conditions, any or all of which
may be waived in whole or in part by Fusion Networks to the extent permitted by
applicable law: (a) the representations and warranties of FNHI contained therein
or otherwise required to be made after the date thereof in a writing expressly
referred to herein by or on behalf of FNHI pursuant to the merger agreement, to
the extent qualified by materiality or material adverse effect, shall have been
true and, to the extent not qualified by materiality or material adverse effect,
shall have been true in all material respects, in each case when made and on and
as of the effective date as though made on and as of the effective date (except
for representations and warranties made as of a specified date, which need be
true, or true in all material respects, as the case may be, only as of the
specified date); (b) FNHI shall have performed or complied in all material
respects with all agreements and conditions contained therein required to be
performed or complied with by it prior to or at the effective time; and (c) FNHI
shall have delivered to Fusion Networks a certificate, dated the effective date,
signed by the President or any Vice President of FNHI (but without personal
liability thereto), certifying as to the fulfillment of the conditions specified
above.
Termination of the Merger Agreement
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time, whether before or after the approval of
the merger by the vote of stockholders of IDM and Fusion Networks, by mutual
written consent of Fusion Networks and IDM by action of their respective boards
of directors.
The merger agreement may also be terminated and the merger may be abandoned
at any time prior to the effective time by action of the board of directors of
either IDM or Fusion Networks if: (a) the merger shall not have been consummated
by March 31, 2000, whether such date is before or after the date of approval of
the merger by the vote of stockholders of IDM and Fusion Networks; provided,
however, that if either IDM or Fusion Networks determines that additional time
is necessary in connection with obtaining any consent, registration, approval,
permit or authorization required to be obtained from any governmental entity,
the termination date may be extended by IDM or Fusion Networks from time to time
by written notice to the other party to a date not beyond June 30, 2000; (b) the
requisite vote of the stockholders of Fusion Networks shall not have been
obtained at the Fusion Networks stockholder meeting or at any adjournment or
postponement thereof; (c) any law permanently restraining, enjoining or
otherwise prohibiting consummation of the merger shall become final and
non-appealable (whether before or after the approval of the merger by the
stockholders of Fusion Networks); or (e) any governmental entity shall have
failed to issue an order, decree or ruling or to take any other action which is
necessary to fulfill the conditions set forth in the merger agreement and such
denial of a request to issue such order, decree, ruling or take such other
action shall have been final and nonappealable; provided, that the right to
terminate the merger agreement shall not be available to any party that has
breached in any material respect its obligations under the merger agreement in
any manner that shall have proximately contributed to the occurrence of the
failure of the merger to be consummated.
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time, whether before or after the approval of
the merger by Fusion Networks stockholders, by action of the Fusion Networks
board if there is a breach by FNHI or IDM of any representation, warranty,
covenant or agreement contained in this Agreement that would give rise to a
failure of a condition which has not been cured within 15 business days
following receipt by IDM of written notice of such breach;
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The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time, whether before or after the approval of
the merger by the vote of IDM stockholders if there is a breach by Fusion
Networks of any representation, warranty, covenant or agreement contained in the
merger agreement that would give rise to a failure of a condition which has not
been cured within 15 business days following receipt by Fusion Networks of
written notice of such breach
In the event of termination of the merger agreement and the abandonment of
the merger, the merger agreement shall become void and of no effect with no
liability on the part of any party thereto (or of any of its directors,
officers, employees, agents, legal and financial advisors or other
representatives); provided, however, no such termination shall relieve any party
hereto of any liability or damages resulting from (i) any willful breach of any
representations or warranties contained in the merger agreement or (ii) any
breach of any covenant or agreement contained in the merger agreement.
Amendment and Waiver
The merger agreement may be amended by action taken by Fusion Networks and
IDM at any time before or after approval of the merger by the Fusion Networks
stockholders and the IDM stockholders but, after any such approval, no amendment
shall be made which requires the approval of such stockholders under applicable
law without such approval. The merger agreement may not be amended except by an
instrument in writing signed on behalf of the parties hereto. At any time prior
to the effective time, each party to the merger agreement may (i) extend the
time for the performance of any of the obligations or other acts of the other
party, (ii) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document, certificate or writing
delivered pursuant hereto, or (iii) waive compliance by the other party with any
of the agreements or conditions contained therein, other than the requirement
that IDM receive an opinion of special tax counsel that the merger will be
treated as a tax-free reorganization. Any agreement on the part of either party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of either
party to assert any of its rights thereunder shall not constitute a waiver of
such rights.
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IDM ENVIRONMENTAL CORP. SUMMARY HISTORICAL FINANCIAL DATA
(in thousands, except per share data)
IDM historical figures as of and for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 have been derived from its consolidated financial
statements and related notes. IDM's financial statements as of December 31, 1997
and 1998 and for each of the five years in the period ended December 31, 1998
have been audited by Samuel Klein and Company. IDM's historical figures as of
and for the nine months ended September 30, 1998 and 1999 have been derived
from, and should be read in conjunction with, IDM's unaudited financial
statements that have been prepared on the same basis as the audited financial
statements and, in the opinion of IDM's management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial data for the periods presented. The financial data for the
interim periods are not necessarily indicative of results that may be expected
for any other interim period or for the year as a whole. The historical figures
that follow are qualified by reference to the financial statements of IDM and
the related notes thereto set forth herein.
<TABLE>
Nine Months
Years ended December 31, ended September 30
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
(Unaudited)
Income Statement Data:
Operating revenues:
Contract revenues.. $ 25,362 $ 33,866 $20,808 $17,826 $20,019 $ 14,547 $ 7,557
Other.............. 22 - - - - - -
Equipment and scrap revenues 3,150 5,537 834 96 - - -
-------- -------- ------ ------ ------- ------- ------
Total operating revenues 28,534 39,403 21,642 17,922 20,019 14,547 7,557
Cost of sales:
Direct job costs... 20,449 30,433 21,492 17,002 20,258 15,844 9,009
Unusual job costs.. - 3,300 - - - - -
Cost of equipment.. 1,651 2,977 943 647 - - -
Write-down of inventory - - - - - - 583
-------- -------- ------ ------ ------- ------- ------
Gross profit (loss). . . 6,434 2,693 (793) 273 (239) (1,296) (2,035)
Operating expenses:
General and administrative 5,418 7,637 9,567 10,538 12,871 8,775 5,237
Depreciation and amortization 344 653 668 723 627 483 268
Equity in net loss of
unconsolidated partnerships - - - - 194 - 36
-------- -------- ------ ------ ------- ------- ------
Income (loss) from operations 672 (5,597) (11,028) (10,988) (13,932) (10,554) (7,576)
Interest income (expense), net (36) 200 30 (513) 4,322 (4,418) (77)
-------- -------- ------ ------ ------- ------- ------
Income (loss) before income tax 636 (5,397) (10,998) (11,501) (18,253) (14,972) (7,652)
Provision (credit) for income taxes 312 (1,530) (1,850) (1,561) 4,170( (400) (1,200)
-------- -------- ------ ------ ------- ------- ------
Net income (loss).... $ 324 $(3,867) $ (9,148) $ (9,940) $(22,423) $(14,572) $ (6,452)
======== ======== ======= ======= ======= ======= ======
Net income (loss) on common stock $ 324 $(3,867) $ (9,148) $(11,224) $(26,442) $(18,372) $ (6,464)
======== ======== ======= ======= ======== ======= =======
Net income (loss) per share (1) $ 0.60 $ (6.70) $ (11.30) $ (10.01) $ (13.31) $ (10.32) $ (2.07)
======== ======== ======= ======= ======== ======= =======
Weighted average shares
outstanding (1)... 557,798 581,556 808,947 1,121,269 1,987,264 1,780,221 3,120,383
======== ======== ======= ========= ======== ======= =======
</TABLE>
December 31, September
1997 1998 30, 1999
------ ------ -----------
Balance Sheet Data: (unaudited)
Working capital.................................$ (1,149) $ (487 $ (4,294)
Total assets.................................. 27,151 15,151 11,560
Long-term liabilities........................... 259 65 24
Minority interest............................... - - -
Shareholders' equity............................ 18,079 7,885 2,353
___________________
(1) Adjusted to give retroactive effect to a 1-for-10 reverse stock split
effective April 16, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IDM
The following discussion of the Financial Condition and Results of
Operations of IDM contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1993 and Section 21e of the Securities
Exchange Act of 1934. IDM's actual results and timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this joint proxy statement/prospectus. 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 our
traditional environmental services and plant relocation services projects.
Recent Developments
Due to continued difficult conditions in the environmental services markets
and limited resources, we have experienced a decline in the number of
traditional environmental service projects on which we have bid and performed
services during the first three quarters of 1999. In response to those
conditions, we have concentrated our efforts on securing specialty contracts,
efforts to participate in nuclear remediation projects and efforts to finalize
arrangements and commence services on our EWN project in Germany. At September
30, 1999, we had a backlog of approximately $3.5 million of signed services
contracts as compared to a backlog of approximately $8 million at December 31,
1998. The largest project in our backlog at September 30, 1999, was the Bound
Brook project, with an estimated value for the balance of services to be
performed of $3 million. The Bound Brook project began in August 1999 and is
scheduled to be completed during 2002. 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 September 30, 1999 does not include services
expected to be rendered under the EWN project in Germany. We expect to finalize
a comprehensive agreement for the revitalization of the EWN site during the
first half of 2000 and to be performing remediation services starting in 2000.
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 2000.
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.
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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
2000 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 mid-2000.
While we anticipate that entry into the energy production, waste treatment
and nuclear facilities decommissioning and site revitalization market will
provide significant opportunities for sustainable growth in both revenues and
operating profits, entry into those markets requires substantial capital
commitments and involves certain risks. Undertaking energy production, waste
treatment and nuclear decommissioning projects can be expected to require
capital expenditures of as little as several million dollars to hundreds of
millions of dollars per project. We do not currently have the necessary capital
resources to undertake such ventures without third-party financing. We
anticipate that we will take on equity partners and seek third party debt
financing to finance substantial portions of the projects which we expect to
undertake. While we have been successful in attracting substantial partners in
carrying out various phases of the EWN nuclear decommissioning/site
revitalization project, we have no commitments from potential partners and
financing sources to provide funding for future projects and there is no
assurance that such partners and financing sources will be available, or will
provide financing on acceptable terms, if and when we commence future projects.
There is substantial 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.
$150,000 was paid at closing with the balance payable in monthly installments
over eight months. We are presently evaluating the sale of properties in Poland
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.
In light of continued uncertainty effecting our operations at the end of
the third quarter of 1999, management has evaluated various options outside of
its traditional businesses to return the company to profitability and to
increase shareholder value. Pursuant to those efforts, in July 1999, we entered
into a letter of intent, and subsequently a merger agreement, to acquire Fusion
Networks, Inc. in exchange for approximately 26 million shares of common stock.
Fusion Networks is a newly formed company which is in the process of building a
portal-type web site with an initial emphasis on Latin America and the Hispanic
market in the United States. The proposed acquisition is subject to a number of
conditions, including approval of the acquisition by the shareholders of both
IDM and Fusion Networks, receipt by our board of directors of a "fairness
opinion" from an investment banking firm, the receipt of all necessary
regulatory approvals and the negotiation and execution of definitive
documentation. There can be no assurance that the acquisition will be
successfully implemented or that there will not be modifications to the
acquisition terms.
During 1999, 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 was our most significant remediation project during 1999. During the
second quarter of 1999, we completed work on the phase of the Oak Ridge Project
which was begun during 1998. Commencement of additional services at the Oak
Ridge Project has been delayed and future services are in doubt as a result of
disputes relating to two contracts at the Oak Ridge site. The first dispute
relates to an asset recovery contract, where the value of the equipment salvaged
pays for our cost of dismantling and removing the equipment. During the second
quarter of 1999, we became aware of several previously undisclosed problems that
reduced the value of the equipment and increased the costs to decontaminate and
remove the equipment. During September 1999, we were terminated from the
contract by the contractor. We have filed a request for arbitration which if
successful would probably be determined in the first half of 2000. The second
dispute relates to our determination during the second quarter of 1999 that the
waste we were required to dispose of had to be buried in a mixed waste cell at a
higher cost than the low-level waste cell it was supposed to go to because the
waste had undisclosed PCB's. Also, we were planning on decontaminating the steel
and selling it for scrap which would avoid disposal costs. Because the
contractor said we had to remove all the paint from the steel before they would
release it, it became more cost
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effective to dispose of the steel in a low-level waste facility. We have a
mediation scheduled for early 2000 to address these changes. Because of these
disputes and because our contract was terminated and subsequently reinstated,
our revenues at the Oak Ridge Project have been curtailed and we have incurred
losses on that project.
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 was 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 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. In July of 1999, we
assigned our claim with respect to the East Dam Project to our contractor for
$650,000. The contractor will pursue the claim, paying all direct claim costs,
including costs of experts. In the event the claim results in a payment to the
contractor, the payment will be distributed 70% to the contractor and 30% to us
after deducting direct claim costs and the $650,000 paid by the contractor.
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, IDM 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 2000. Additionally, we continue in our efforts to
complete development of, and to begin realizing revenues from, one or more other
energy and/or waste treatment facilities. However, given the capital
requirements and time required to bring energy projects operational, we are
exploring various options to minimize our costs in pursuing those projects,
including selling substantial equity positions in our energy projects while
retaining smaller minority positions or, where appropriate, selling our
positions outright in exchange for recovery of our investments plus a
development fee.
We performed no plant relocation projects during 1998 or the first nine
months of 1999. 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 the first half of 1999 and is
expected to continue to be curtailed until an improvement occurs in those
regions.
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In addition to our core operations, we have entered into selected strategic
investments and undertakings. Those investments and undertakings, as of the
third quarter of 1999, include (1) an equity investment in Life International,
(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 2000.
Results of Operations
Three and Nine Months ended September 30, 1999 and 1998
Revenues. Our total revenues decreased by approximately 34.2% from
$4,532,000 for the quarter ended September 30, 1998 to $2,981,000 for the
quarter ended September 30, 1999. Total revenues decreased by approximately
48.1% from $14,547,000 for the nine months ended September 30, 1998 to
$7,557,000 for the same period in 1999. The decrease in contract income in 1999
from 1998 was primarily attributable to (1) curtailment in services at the Oak
Ridge office which accounted for $2,736,000 of revenues during the third quarter
of 1998 and $6,647,000 of revenues during the nine month period in 1998 as
compared to $930,000 of revenues during the third quarter of 1999 and $3,120,000
of revenues during the nine month period in 1999, and (2) a reduction in the
number and size of contracts performed during the current period as compared to
the same period in 1998, including, in particular, the East Dam project which
was completed in 1998 and which produced revenues of approximately $100,000
during the third quarter of 1998 as compared to none for the third quarter of
1999.
Revenues for the 1999 nine month period included $1 million associated with
the DOE project in Los Alamos, New Mexico which was completed in 1997 and
$650,000 associated with the East Dam project which was completed in 1998. The
payment for the Los Alamos DOE project was for full settlement of our change
order claim in the approximate amount of $2.8 million. The payment for the East
Dam project was consideration for assignment to the contractor on the project of
our claim for additional compensation associated with change orders in the
approximate amount of $10 million. The contractor will pursue the claim, paying
all direct claim costs, including costs of experts. In the event the claim
results in a payment to the contractor, the payment will be distributed 70% to
the contractor and 30% to us after deducting direct claim costs and the $650,000
paid by the contractor.
Cost of Sales. Direct job costs decreased by approximately 11.1% from
$4,349,000 for the quarter ended September 30, 1998 to $3,867,000 for the same
period in 1999. Direct job costs decreased by approximately 43.1% from
$15,844,000 for the nine months ended September 30, 1998 to $9,009,000 for the
same period in 1999. The decrease in job costs was primarily attributable to
completion during 1998 of the East Dam project, which reduction was partially
offset by additional job cost charges associated with the two disputed contracts
in our Oak Ridge, Tennessee office and settlement of the Boston State Hospital
project. As a result of the unforseen problems, we recorded a negative $1.1
million dollar gross margin on the Oak Ridge asset recovery contract during the
second quarter of 1999. Because we have been terminated from the job and have
not been allowed to salvage certain wire, we recorded additional direct costs of
$300,000 during the third quarter of 1999. We recorded negative $1.2 million of
gross margin on the Oak Ridge waste disposal contract during the second quarter
of 1999. Because of price increases from our subcontractor associated with the
waste disposal, we recorded additional direct costs of $400,000 during the third
quarter of 1999. We intend to aggressively pursue contract change orders. Any
revenue received from the change order will be recorded when realized.
Subsequent to September 30, 1999, we settled disputes relating to our Boston
State Hospital project. As a result of that settlement, we recorded additional
direct costs of $300,000 during the third quarter of 1999.
In addition to direct job costs, during the quarter and nine months ended
September 30, 1999, our cost of sales included the write down of our generator
inventory in the amount of $582,517. The write down of that inventory resulted
from continued delays in the commencement of active energy projects on which we
planned to deploy the generator inventory, coupled with continued losses and
limited resources to pursue those projects.
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General and Administrative Expenses. While total revenues decreased by
34.2% for the quarter, general and administrative expenses decreased 29.8% from
$2,394,000 during the quarter ended September 30, 1998 to $1,681,000 during the
same period in 1999. General and administrative expenses decreased 40.3% from
$8,775,000 during the nine months ended September 30, 1998 to $5,237,000 during
the same period in 1999. The decrease in general and administrative expense was
primarily attributable to a decrease in variable overhead due to lower business
levels and to a $1.9 million expense recorded in February, 1998 for options
granted to consultants to purchase 122,000 shares of common stock at the market
price of our common stock at the date of the grant.
Depreciation and amortization. Depreciation and amortization expense
decreased by approximately 75.2% from $165,000 in the 1998 quarter to $41,000 in
the 1999 quarter. Depreciation and amortization expense decreased by
approximately 44.5% from $483,000 during the nine month period ended September
30, 1998 to $268,000 during the nine month period ended September 30, 1999. The
decrease depreciation and amortization expense was primarily attributable to a
decrease in amortization of deferred issuance costs.
Interest Expense. In addition to operating income and expenses, we reported
net interest expense of $31,000 for the quarter ended September 30, 1999 as
compared to net interest expense of $96,000 for the same period in 1998. We
reported a decrease in net interest expense from $4,418,000 for the nine months
ended September 30, 1998 to $77,000 expense for the same period in 1999. The
decrease in net interest expense for the quarter was attributable to foreign
exchange losses on a Canadian contract in the 1998 quarter. The decrease in net
interest expense for the nine months was primarily attributable to $4,169,000 in
interest expense recorded on the convertible notes and related warrants in 1998.
This amount represented the amortization of the beneficial conversion feature of
the convertible notes and warrants.
Miscellaneous. During the first nine months of 1998 and 1999, no provision
was made for post retirement benefits subject to FAS 106.
Credit for Income Taxes. During the 1999 quarter and nine month periods, we
reported a credit for income taxes of $1,200,000 compared to a credit for income
taxes of $400,000 for the 1998 nine month period and no credit for the quarter
ended September 30, 1998. As a result of our continuing losses, we have recorded
no credit for federal income taxes since 1998. The current period credit for
income taxes is attributable to the tax benefit relating to our New Jersey net
operating loss. We applied for participation in the Technology Certificate
Transfer Program sponsored by the New Jersey Economic Development Authority and
have been notified that our application has been approved.
Net loss. As a result of the foregoing, we reported a loss after taxes of
$2,049,000 for the quarter ended September 30, 1999 as compared to a net loss of
$2,472,000 for the same quarter in 1998. We reported a loss after taxes of
$6,452,000 for the nine months ended September 30, 1999 as compared to a loss
after taxes of $14,573,000 for the same period in 1998.
Net loss attributable to common stock. The net loss attributable to common
stock was increased by the preferred stock dividends totaling $4,000 in the 1999
quarter and $52,000 in the 1998 quarter, and an accounting "deemed dividend" of
$300,000 in the 1998 quarter arising from the amortization of the beneficial
conversion feature of our Preferred Stock Series RR. The net loss attributable
to common stock was increased by $11,000 and $169,000 in preferred stock
dividends during the first nine months of 1999 and 1998 and by $0 in 1999 and
$3,630,000 in 1998 arising from the amortization of the beneficial conversion
feature of the Series RR Preferred Stock ($300,000) and the Series C Preferred
Stock ($3,330,000). We are calculating earning per share to comply with the SEC
staff position on accounting for securities issued with beneficial conversion
features. This accounting required that we reflect the difference between the
market price of our common stock and the applicable conversion rate on the
convertible preferred stock as a dividend at the issue date (the beneficial
conversion feature totaled $3,330,000 with respect to the Series C Preferred
Stock and $500,000 with respect to the Series RR Preferred Stock in 1998) and
amortized the dividend from the issue date for the Series C Preferred, February
13, 1998 to June 22, 1998, the date the Registration Statement of the underlying
stock was declared effective and from the issue date of the Series RR Preferred
Stock, August 11, 1998 to November 12, 1998, the date the Registration Statement
of the underlying stock was declared effective.
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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 project 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.
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.
Write-down of the UPE note resulted from unsatisfactory performance of the
note. The note related to the sale in 1995 of certain surplus equipment
inventory to UPE with IDM to receive one-third of the net sale proceeds realized
by UPE from the resale of the equipment with total proceeds to IDM to be in an
amount not less than $4 million. After an initial downpayment on the note,
resales of the equipment were less than projected and payments to IDM were
minimal, totaling $76,000 in 1998. UPE claimed the equipment required
unexpectedly high costs to make the equipment saleable. Because payments were
insufficient to cover the interest accruing on the note and because of
difficulties in reselling the equipment, IDM stopped accruing interest income on
the note during 1997 and wrote-down the note in part during 1997 and again in
1998. During 1999, IDM agreed to accept $300,000 in full settlement of the note.
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.
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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.
Net loss and net loss attributable to common stock. 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.
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 project 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 our 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.
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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.
Net loss and net loss attributable to common stock. 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 our 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.
Liquidity and Capital Resources
At September 30, 1999, we had a working capital deficit of approximately
$4.3 million and a cash balance of $130,000. This compares to a deficit in
working capital of $0.5 million and a cash balance of $0.4 million at December
31, 1998. The changes in working capital and cash were primarily attributable to
a combination of (1) the loss incurred during 1999, including the write down of
our generator inventory, (2) the effects of an increase in accounts payable of
$1.1 million and (3) an adverse change in costs and estimated expenses in excess
of billings of $3.1 million, which were partially offset by (1) cash flow from
the investment and advances from an unconsolidated affiliate of $1.1 million,
(2) the issuance of stock to pay certain vendors and to pay a deposit in lieu of
a bond in the aggregate amount of $523,000 and (3) a $1,200,000 credit for New
Jersey income tax.
Approximately $23,000 of working capital at September 30, 1999 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 us by the completion of such projects. Unbilled costs and
estimated earnings at December 31, 1998 totaled $1.9 million. Billings in excess
of costs and estimated earnings totaled $1.2 million at September 30, 1999 as
compared to $0 at December 31, 1998. The adverse change was primarily
attributable to unfavorable developments with respect to the two disputed
contracts at the Oak Ridge project.
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 ($10.0 million) the following year.
Based on our continuing operating losses, we wrote-off our deferred tax asset
during 1998. During the third quarter of 1999 we recorded a $1,200,000 tax
benefit from the New Jersey NOL. We expect to realize cash from our New Jersey
tax credit in early 2000.
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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 September 30,
1999, we had no bank debt and no significant long-term debt and were funding
operations entirely through cash on hand and operating cash flow which was
supplemented by various borrowings and issuances of stock.
In order to meet working capital needs during 1999, we have borrowed funds
from various parties, including officers, and have issued stock in payment of
certain trade payables. At September 30, 1999, we owed a total of $249,000
primarily to our two principal officers for funds advanced. There are no
definitive repayment terms on such amounts. In June 1999, we borrowed $400,000
from existing stockholders. That loan was repayable in August 1999 with interest
at 6.5%. As inducement for making that loan, we issued 125,000 shares of common
stock to the lenders. $200,000 of the loan had been repaid at September 30, 1999
and the balance of that loan was paid after the quarter. During the quarter
ended September 30, 1999, we issued 79,133 shares of common stock in settlement
of $323,000 of accounts payable and issued 62,000 shares of common stock as
collateral to our surety in lieu of a $200,000 performance bond.
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
September 30, 1999. Such warrants are exercisable to purchase two shares of
common stock each for a price of $90.00, or $45.00 per share. The warrants were
originally exercisable until April of 1999 unless earlier called. We declared a
1-for-10 reverse split of our Common Stock and Class A Warrants effective April
16, 1999 and extended the term of the Class A Warrants to April of 2000.
Exercise of the warrants would provide gross proceeds of approximately $3.1
million and result in the issuance of approximately 70,000 shares after giving
effect to the reverse split. However, given the current price of the Company's
Common Stock, it is not expected that the Class A Warrants will be exercised in
the near future.
In November of 1998, we paid $600,000 to acquire a 49% interest in Kortman
Polonia, a Polish company with substantial real estate holdings. Kortmann
Polonia has initiated discussions with various real estate developers and major
U.S. retailers with respect to the sale of various real estate tracts and the
development and leasing of the remaining tracts.
In addition to funding requirements to support ongoing operations, we have
committed substantial capital resources to implementation of the strategic
initiative known as "Vision 2000." The focus of Vision 2000 is to position us 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 with
capital costs of approximately $55 million, require funding substantially beyond
our current financial capabilities. We have, for this reason, entered into
agreements with parties interested in the Salvadorean market to acquire our
assets in the country. The sale of these assets is expected to be completed by
the end of the first quarter of 2000. 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 power projects
such as the Bolivia and El Salvador Power Project, and other similar projects,
on line, carry out any required repairs
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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. 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.
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 approved a 1-for-10 reverse split of our
common stock and warrants to be effective April 16, 1999. On May 7, 1999, NASDAQ
informed us of their decision that because of our failure to comply with the
minimum $5,000,000 market value of public float requirement for the past 37
consecutive trading days as of that date, that effective with the open of
business of May 11, 1999, our securities were transferred from the National
Market to the Small Cap Market, pursuant to the maintenance criteria.
We believe that our working capital, combined with the expected receipt of
funds from the resolution of certain change orders and litigation, is sufficient
to meet our anticipated needs, other than project financing requirements
discussed above, for at least the following twelve months, including the
performance of all existing contracts. 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 the end of the fourth 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.
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.
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FUSION NETWORKS, INC. SUMMARY HISTORICAL FINANCIAL DATA
(in thousands, except per share data)
Fusion Networks historical figures as of and for the period from inception
to September 30, 1999 have been derived from Fusion Networks' financial
statements and related notes. Fusion Networks' financial statements as of and
for the period from inception to September 30, 1999 have been audited by Samuel
Klein and Company. The historical figures that follow are qualified by reference
to the financial statements of Fusion Networks and the related notes thereto set
forth herein.
Period from Inception (July 1, 1999) to
---------------------------------------
September 30, 1999
------------------
Income Statement Data:
Revenues..................................... $ -
Loss from operations......................... (413,697)
Net loss..................................... $ (409,238)
Net loss per common share.................... $ (0.01)
Weighted average shares outstanding.......... 27,450,136
September 30, 1999
-------------------
Balance Sheet Data:
Working capital.............................. $ 2,507,251
Total assets................................. 3,154,872
Long-term liabilities........................ -
Shareholders' equity......................... 2,950,263
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUSION NETWORKS
All per share amounts are adjusted to give retroactive affect to a
1,000-for-1 split effective August 23, 1999 and a 17.7333333 -for-1 split
effective November 18, 1999.
Fusion Networks, Inc. is a start-up Internet company founded in 1999 to
provide improved Internet content and services to Latin American markets and to
the Spanish and Portugese speaking population around the world.
Plan of Operation
We launched, on a pilot basis, our Internet site, LatinFusion.com, in
Bogota, Colombia in October 1999 and launched our site in Miami, Florida in
January 2000 with a formal international launch of our site scheduled for
February 2000. During the twelve months following our scheduled site launch, we
plan to:
* launch LatinFusion.com in at least 14 additional targeted
cities/regions throughout the Americas and Europe.
* register at least 500,000 users of its LatinFusion.com site.
* establish client/strategic partner relationships with at least 50
advertisers and electronic commerce merchants.
* implement additional and/or improved service offerings.
The pilot site launch in Bogota, Colombia included basic content developed
for the Bogota market. The launch was accompanied by an advertising and public
relations campaign to introduce LatinFusion.com to the Bogota market.
Following the launch of LatinFusion.com in Bogota and pilot site testing,
we began operations of our site in Miami in January 2000 and plan to formally
launch the site to the international market in February 2000 followed by site
launches in six additional Latin American markets, five U.S. markets, two
European markets and one Canadian market over the following six months. Each of
those markets has been targeted based on large Spanish or Portugese speaking
populations. Each of the planned site launches is expected to mirror the Bogota
site launch, with the site offering localized content and being promoted by an
advertising and public relations campaign.
Through our public relations campaigns, localized content and banner free
site, we expect to achieve high levels of brand awareness and site usage by
Internet users in our target markets. We intend to gather user data and register
users through various free service offerings, such as e-mail, and periodic data
gathering questions which will appear on our site.
Simultaneous with launching our site in various markets and registering
users, we intend to negotiate strategic partnerships and relationships with
various advertisers and electronic commerce merchants to advertise or offer
merchandise on our site. We intend to capitalize on our expected growing user
base and "infomercial" format to differentiate our site and attract strategic
partners.
Throughout the first twelve months following our site launch, we intend to
expand and improve our site by adding new and improved localized content and
services.
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Results of Operations - July 1, 1999 (Inception) to September 30, 1999
For the period from inception (July 1, 1999) to September 30, 1999, we were
involved in development stage activities and had no operating revenues.
Expenses totaled $413,697 through September 30, 1999. Expenses incurred
through September 30, 1999 were primarily attributable to staffing and site
development.
Our loss totaled $409,238 for the three months ended September 30, 1999.
Capital Resources; Private Placements
At September 30, 1999, we had cash reserves and cash equivalents of
$2,711,860. We had no long term debt at September 30, 1999.
We have funded our operations to date through capital contributions of
founders and two private placements of equity securities. Securities issued to
date have consisted of the following:
* In June 1999, the four founding shareholders subscribed for a total of
13,300,000 shares of common stock (after giving effect to a 1,000 for 1
stock split and a 17.733333 for 1 stock split) for an aggregate of $750.
Those shares were issued pursuant to the exemption set forth in Section
4(2) of the Securities Act of 1933.
* In July 1999, we sold 4,433,333 shares of common stock (after giving effect
to a 1,000 for 1 stock split and a 17.733333 for 1 stock split) to four
accredited investors for $500,000 and granted an option to those investors
to acquire an additional 8,866,667 shares of common stock for $500,000. In
August 1999, the investors exercised their option and acquired an
additional 8,866,667 shares for $500,000. Those shares were sold in a
privately negotiated transaction pursuant to the exemption set forth in
Section 4(2). No commissions were paid on the sale of those shares.
* In November 1999, we completed a private placement pursuant to which 150.66
units (the "Units") were sold to accredited investors at $60,000 per Unit,
or aggregate gross proceeds of $9,040,000. Each Unit consists of 20,000
shares of common stock and 20,000 three year warrants (the "Fusion
Warrants") to purchase common stock at $6.00 per share. As of September 30,
1999, a total of 42.5 Units had been sold resulting in the issuance of
850,136 shares of common stock and 850,136 Fusion Warrants for net proceeds
of $2,358,750. Subsequent to September 30, 1999, an additional 108.16 Units
were sold resulting in the issuance of 2,163,200 shares of common stock and
2,163,200 Fusion Warrants for net proceeds of $6,002,880. Those shares and
warrants were sold to 21 accredited investors without general solicitation
or advertising pursuant to the exemption set forth in Rule 506 of
Regulation D. The certificates evidencing those securities bear legends
restricting transfer. In connection with the placement of Units, we paid
finders fees of 7.5% and issued 226,000 warrants, which were identical to
the Fusion Warrants, to finders.
* Also, subsequent to September 30, 1999, we issued 2,500,000 three year
warrants exercisable at $5.00 per share to four consultants. Those warrants
were issued pursuant to the exemption set forth in Section 4(2) of the
Securities Act of 1933.
* In December 1999, we issued 3,500,000 shares of common stock to Marketing
Services Group, Inc. in exchange for 1,500,000 shares of common stock of
MSGI. Pursuant to that transaction, we granted to MSGI a six month right,
terminating in June 2000, to acquire up to an additional 3,500,000 shares
of common stock for an additional 1,500,000 shares of common stock of MSGI.
The securities issued to MSGI were issued in a privately negotiated
transaction pursuant to the exemption set forth in Section 4(2) of the
Securities Act of 1933. The certificates evidencing the shares of common
stock issued to MSGI, as well as the shares received from MSGI, bear
restrictive legends and are subject to a "lock-up" provision pursuant to
which such shares may not be resold for a period of one year ending
December 2000.
* In December 1999, we issued 500,000 three year warrants exercisable at
$5.00 per share to one consultant. Those warrants were issued pursuant to
the exemption set forth in Section 4(2) of the Securities Act of 1933.
Financing Requirements
In order to carry out our plan of operations through September 2000, we
anticipate spending approximately $38 million. Our budget for that period
includes approximately $13.3 million for advertising and public relations of
which $300,000 was budgeted for the Bogota pilot site launch, $9.1 million for
staffing, content development, technical support, local hardware, software and
infrastructure investment and other non-public relations expenses for fifteen
additional site launches, $1.5 million for support and operations in our Miami
and Bogota offices of which $900,000 is budgeted for hardware, software and
infrastructure investment, and $1.2 million of working capital.
At September 30, 1999, we had invested approximately $309,000 for hardware,
software and infrastructure in Bogota and Miami and $0 for promotional expenses
associated with the Bogota site launch. Each additional site launch is expected
to require the investment of approximately $800,000 for the purchase of servers,
routers, telecommunications equipment and other hardware, software and
infrastructure to support local operations.
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<PAGE>
At December 31, 1999, our employee headcount was 28, including 5 executives
and administrative personnel in our Miami headquarters and 4 persons in sales
and marketing. We intend to staff offices in each city where our site is
introduced with between seven and nine persons, with each office having an
office manager who will be responsible for business development and sales
oversight, a webmaster to administer our site, two to three sales persons, two
to three content developers and an accounting support person. Assuming the
complete implementation of our plan of operations by September 2000, our
employee headcount at that time is expected to total approximately 200.
Our cash and cash equivalents on hand at December 31, 1999 were sufficient
to support the introduction and operation of our Bogota and Miami sites as well
as in Madrid, Mexico City, Buenos Aires and Sao Paulo through March 2000 but
were not sufficient to support the introduction of our site in additional
markets. In order to fully carry out our plan of operations through September
2000, as budgeted, we will be required to raise approximately $29 million of
additional funding. There is no assurance that we will be able to raise such
additional funding. If we are unable to raise the additional capital necessary
to support the full implementation of our plan of operations, we will be limited
in the number of markets in which we can operate, our potential revenues will be
limited and the viability of our business plan may be adversely affected.
72
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data for Fusion
Networks Holdings, Inc. is based on the historical financial statements of
Fusion Networks, Inc. and IDM Environmental Corp. (collectively with it's
subsidiaries referred to herein as "IDM") which appear elsewhere in this Joint
Proxy Statement/Prospectus and has been prepared on a pro forma basis to give
effect to the merger under the purchase method of accounting, as if the
transaction had occurred at January 1, 1998 for each operating period presented.
The pro forma information was prepared based upon certain assumptions described
below and may not be indicative of results that actually would have occurred had
the merger occurred at the beginning of the last full fiscal year presented or
of results which may occur in the future. The unaudited pro forma consolidated
financial data and accompanying notes should be read in conjunction with the
annual and interim financial statements and notes thereto of Fusion Networks,
Inc. and IDM Environmental Corp. appearing elsewhere herein and incorporated by
reference into this Joint Proxy Statement/Prospectus.
The unaudited pro forma consolidated balance sheet as of September 30, 1999
presents the financial position of Fusion Networks Holdings, Inc. as if the
merger had occurred on that date and was prepared utilizing the audited Fusion
Networks, Inc. balance sheet as of September 30, 1999 and the unaudited IDM
Environmental Corp. balance sheet as of September 30, 1999. The pro forma
consolidated statements of operations data presented assumes the merger occurred
at the beginning of the periods presented. It should not be assumed that IDM
Environmental Corp. and Fusion Networks, Inc. would have achieved the unaudited
pro forma consolidated results if they had actually been combined during the
periods shown.
The merger is expected to be accounted for as a purchase. The stockholders
of Fusion Networks, Inc. will receive one share of common stock of Fusion
Networks Holding, Inc. for each share of Fusion Networks, Inc. common stock held
and the stockholders of IDM will receive one share of Fusion Networks Holdings,
Inc. for each share of IDM common stock held, resulting in the current
stockholders of Fusion Networks, Inc. owning approximately 90% of Fusion
Networks Holdings, Inc. common stock. The proposed plan of merger is subject to
a number of conditions including, but not limited to, regulatory approvals and
the receipt of stockholder approval from both the Fusion Networks, Inc. and IDM.
The unaudited pro forma consolidated results are based on estimates and
assumptions, which are preliminary and have been made solely for the purposes of
developing such pro forma information. The unaudited pro forma consolidated
results are not necessarily an indication of the results that would have been
achieved had such transactions been consummated as of the dates indicated or
that may be achieved in the future.
The unaudited pro forma combined results should be read in conjunction with
the historical consolidated financial statements and notes thereto set forth
herein, and other financial information pertaining to IDM and Fusion Networks,
Inc. including "Management's Discussion and Analysis of Financial Condition and
Results of Operations of IDM", Management's Discussion and Analysis of
Financial Condition and Results of Operations of Fusion Networks, Inc." and
"Risk Factors".
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<PAGE>
FUSION NETWORKS HOLDINGS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
Fusion
Fusion Networks
IDM Networks Holdings, Inc.
September 30, 1999 September 30, 1999 Pro Forma Pro Forma
(Unaudited (Audited) Adjustments Results
------------------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $130,284 $2,711,860 $6,003,250 (1) $8,845,394
Accounts receivable 2,310,741 2,310,741
Notes receivable - curren 141,198 141,198
Inventory - 0
Costs and estimated earnings
in excess of billings 23,171 23,171
Recoverable income taxes 1,200,000 1,200,000
Prepaid expenses and other
current assets 1,083,530 1,083,530
---------- ----------- -------------- -----------
Total Current Assets 4,888,924 2,711,860 6,003,250 13,604,034
Goodwill, net of accumulated 6,818,235 (5)
amortization (1,704,559)(6) 5,113,676
Investments in and Advances
to Unconsolidated Affiliates 1,275,211 1,275,211
Investment in Affiliate, at cost 1,853,125 25,500,000 (4) 27,353,125
Property, Plant and Equipment, net 2,362,743 308,659 2,671,402
Deposit in Lieu of Bond 200,000 200,000
Other Assets 979,925 134,353 1,114,278
---------- ----------- -------------- -----------
$11,559,928 $3,154,872 $36,616,926 $51,331,726
========== =========== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $214,485 $ - $ - $214,485
Accounts payable and accrued
expenses 7,497,248 204,609 (473,242)(2) 7,228,615
Billings in excess of costs and
estimated earnings 1,222,224 1,222,224
Due to officers 248,686 248,686
---------- ----------- -------------- -----------
Total Current Liabilities 9,182,643 204,609 (473,242) 8,914,010
Long-Term Debt 23,881 23,881
---------- ----------- -------------- -----------
Total Liabilities 9,206,524 204,609 (473,242) 8,937,891
---------- ----------- -------------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock 34,522 274 22 (1)
788 (2)
(35,275)(5) 366
35 (4)
Additional paid-in-capital 58,357,336 3,359,227 6,003,228 (1)
472,454 (2)
450,000 (3)
25,499,965 (4)
(56,453,179)(5)
6,818,235 (5)
(1,704,559)(6) 42,802,707
Retained deficit (56,038,454) (409,238) (450,000)(3)
56,488,454 (5) (409,238)
---------- ----------- -------------- -----------
Total Stockholders' Equity 2,353,404 2,950,263 37,090,168 42,393,835
---------- ----------- -------------- -----------
$11,559,928 $3,154,872 $36,616,926 $51,331,726
========== =========== ============== ===========
</TABLE>
See notes to Pro Forma Consolidated Financial Data.
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<PAGE>
FUSION NETWORKS HOLDINGS, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
For the nine months ended September 30, 1999 (IDM)
For the Year Ended For the period from inception (July 1, 1999) to
December 31, 1998 September 30, 1999 (FN)
---------------------------------------------- -------------------------------------------------
Fusion Fusion
Networks Networks
Holdings, Inc. Fusion Holdings, Inc.
IDM Fusion Pro Forma Pro Forma IDM Networks Pro Forma Pro Forma
(Audited) Networks Adjustments Results (Unaudited) (Audited) Adjustments Results
----------- ---------- ----------- ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract Income $20,018,564 $20,018,564 $7,556,608 $ $7,556,608
Direct Job Costs 20,257,642 20,257,642 9,008,924 9,008,924
Write-down of inventory
surplus 582,517 582,517
----------- -------- ------------ ---------- ---------- ---------- -----------
Gross Profit (Loss) (239,078) 0 (239,078) (2,034,833) 0 0 (2,034,833)
----------- -------- ------------ ---------- ---------- ---------- -----------
Costs and Expenses:
General and
administrative expenses 12,871,481 12,871,481 5,236,925 39,111 5,276,036
Product development and
engineering 310,931 310,931
Sales and marketing 17,655 17,655
Merger expenses 46,000 450,000(3) 496,000
Depreciation and
amortization 626,766 974,034(6) 1,600,800 268,098 730,525(6) 998,623
Equity in net loss of
unconsolidated
partnerships 194,243 194,243 35,854 35,854
----------- -------- ---------- ------------ ---------- ---------- ---------- -----------
13,692,490 0 974,034 14,666,524 5,540,877 413,697 730,525 7,135,099
----------- -------- ---------- ------------ ---------- ---------- ---------- -----------
Loss from Operations (13,931,568) 0 (974,034) (14,905,602) (7,575,710) (413,697) (730,525) (9,169,932)
Other Income (Expense):
Interest income
(expense) (4,321,714) (4,321,714) (76,568) 4,459 (72,109)
----------- -------- ----------- ------------ --------- ---------- ---------- -----------
Loss before Credit for
Income Taxes (18,253,282) 0 (974,034) (19,227,316) (7,652,278) (409,238) (730,525) (9,242,041)
Provision (Credit) for
Income Taxes 4,170,000 4,170,000 (1,200,000) - (1,200,000)
----------- -------- ----------- ------------ --------- ---------- ---------- -----------
Net Loss (22,423,282) 0 (974,034) (23,397,316) (6,452,278) (409,238) (730,525) (8,042,041)
Preferred Stock Dividends
including amortization
of beneficial conversion
feature 4,018,774 4,018,774 11,289 - 11,289
----------- -------- ----------- ------------ ---------- ---------- ---------- -----------
Net Loss on Common Stock $(26,442,056) $ 0 $(974,034) $(27,416,090) $(6,463,567) $(409,238) $(730,525)$(8,053,330)
=========== ======== ========== ============ ========== =========== ========== ============
Loss per Share:
Basic loss per share $ (13.31) $ (0.75) $ (2.07) $ (0.01) $ (0.22)
=========== ============ ========= ========== ============
Diluted loss per share $ (13.31) $ (0.75) $ (2.07) $ (0.01) $ (0.22)
=========== ============ ========= ========== ============
Basic commons shares
outstanding 1,987,264 36,644,428 3,120,383 27,540,136 36,644,428
Diluted common shares
outstanding 1,987,264 36,644,428 3,120,383 27,540,136 36,644,428
</TABLE>
See notes to Pro Forma Consolidated Financial Data.
75
<PAGE>
FUSION NETWORKS HOLDINGS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
SEPTEMBER 30, 1999
On August 18, 1999 Fusion Networks, Inc. ("FNI") and IDM Environmental
Corp. (collectively with it's subsidiaries herein referred to as "IDM") entered
into a definitive Plan of Reorganization and Merger and the formation of a
holding company, Fusion Networks Holdings, Inc. ("FNHI"). Under the terms of the
Plan of Reorganization and Merger, IDM will become a wholly owned subsidiary of
FNHI and a wholly owned subsidiary of FNHI will merge with and into FNI.
Following the merger, FNI will be a wholly owned subsidiary of FNHI. The
stockholders of FNI will receive one share of common stock of FNHI for each
share of FNI common stock held and the stockholders of IDM will receive one
share of FNHI for each share of IDM common stock held, resulting in the current
stockholders of FNI owning approximately 90% of FNHI common stock. The proposed
plan of merger is subject to a number of conditions including, but not limited
to, regulatory approvals and the receipt of stockholder approval from both the
FNI and IDM stockholders.
Pro Forma Adjustments
(1) To record the remaining balance of the private placement offering for
Fusion Networks, Inc. net of brokers commissions.
(2) To record the issuance of 78,810 shares of IDM's common stock in
settlement of $473,242 of IDM's trade accounts payable during the fourth
quarter 1999 and January 2000.
(3) To record as compensation, merger expenses for 400,000 consultant stock
options granted with an exercise price of $1.15, the market price at the
date of grant. The options were granted for a ten year period and vest upon
the completion of the merger. The estimated fair market value of $450,000
for this option is based on the Black Scholes value option pricing model.
(4) To record the acquisition of 1,500,000 shares or approximately 6% of
the outstanding common stock of Marketing Services Group, Inc. and the
issuance of 3,500,000 shares of common stock of Fusion Networks as
consideration for those shares.
(5) To record the purchase of IDM and the issuance of 33,113,400 shares of
common stock of Fusion Networks Holdings, Inc. to the stockholders of
Fusion Networks, Inc. and the issuance of 3,531,028 shares of common stock
of Fusion Networks Holdings, Inc. to the stockholders of IDM and the
elimination of IDM's accumulated deficit as a result of the merger. The
transaction, accounted for as a purchase, resulted in goodwill of
$6,818,235 being recorded. The purchase price and goodwill was determined
as follows:
IDM common shares outstanding 3,531,028
Estimated fair value of shares issued $ 2.47(a)
---------
Purchase price before merger costs 8,721,639
Merger costs 450,000
---------
Purchase price 9,171,639
IDM net book value 2,353,404
---------
Goodwill $6,818,235
=========
(a) The estimated fair value of shares issued was determined
using the average closing market price of IDM's common stock
for the 3 days prior and 3 days subsequent to the public
announcement of the letter of intent.
(6) To record amortization of goodwill over a seven year period.
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<PAGE>
BUSINESS AND PROPERTIES OF IDM
IDM Environmental Corp. 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
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 provides 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
are provided through IDM Energy Corporation and local project subsidiaries. We
actively entered the Energy and Waste Services market in 1996 following our
acquisition of the rights to utilize and deploy the proprietary "Kocee" 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. Because of difficulties incurred in El
Salvador, we have entered into an agreement to sell our assets in El Salvador
which sale is expected to close during the first quarter of 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
2000. Additionally, we continue to pursue additional energy and waste treatment
facility "build, own and operate" opportunities in Asia, Eastern Europe, Central
and South America. 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."
IDM 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.
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.
77
<PAGE>
In 1997, we began to implement a strategic plan to capitalize on our
strengths and market opportunities to position our 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 1996, of the proprietary
"Kocee" 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 sale of the project will be
finalized by the first quarter of 2000.
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 2000 and that the commencement of
operations in the Republic of Georgia 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.
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 re-erecting 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."
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<PAGE>
Industry Background
Environmental Services Industry. The environmental remediation industry,
for all intents and purposes, emerged in the 1970s from the enactment of the
"Superfund" legislation in 1976 and, subsequently, the Resource Conservation and
Recovery Act ("CRA" 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, Remedial Investigations/Feasibility Studies, Engineering
Evaluations/Cost Analysis 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 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 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 "ristine" 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.
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 and Department of Energy 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.
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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. 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. 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.
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.
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.
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.
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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, (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 do we 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."
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.
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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.
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 our 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 our 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.
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.
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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.
Beginning with our formation of a strategic alliance with Solucorp
Industries Ltd. 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.
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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.
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.
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 in the first half
of 2000. Project engineering is expected to begin immediately after execution of
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a definitive agreement with the decommissioning and remediation work expected to
last approximately 10 years. The German federal government has established a
reserve 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 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 first
half of 2000. 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, 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.
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.
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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 Enviropower Industries, Inc. (fka 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.
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
Bolivia 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.
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Georgia Energy Projects. In November of 1998, we, through our wholly-owned
subsidiary, IDM Energy Corporation, signed a Protocol of Intention with the
Ministry for Fuel and Energy 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 operates a 42 MW hydroelectric power plant pursuant to a lease
of that facility from the Georgian government. 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 effective 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. 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
then under contract and to secure a fuel supply and financing for the project.
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. As of December 1999, we had agreed to the principal terms
of a revised PPA with CAESS and had entered into a Memorandum of Understanding
with Centrans Energy Services to sell our PPA. We were also engaged in
discussions with various parties to sell the land and permits relating to the El
Salvador Power Project. The sale of these assets is expected to be concluded by
the first quarter of 2000.
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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 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 fourth quarter of 1999 and that
phase one of the facility, a 10-tons-per-day demonstration unit, will be
operational by early 2000, with phase two, a 50-tons-per-day unit, expected to
be operational by mid-2000 and completion of phase three, bringing the capacity
of the plant to 200-tons-per day, expected by the end of 2000. In connection
with our efforts in Taiwan, we have secured exclusive licensing and development
rights with respect to the technology in Taiwan.
Other Energy and Waste Treatment Projects. During 1998, we entered into an
agreement with respect to the proposed joint development of energy projects in
Bolivia. 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 an 82 MW plant in Bolivia. 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 interests 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.
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.
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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.
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 fourth 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 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 50%
interest in Seven Star, a BVI company. We contributed $300,000 to the capital of
Seven Star and Jin Xin (Holding), Inc. 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.
In December of 1997, Seven Star entered into an initial sublicense
agreement with Zheng Zhou Wo Li Beverage Limited covering a territory consisting
of Zheng Zhou, Henan, in the People's Republic of China and providing for a
minimum guarantee payment of $600,000 and 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 second 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.
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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 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.
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
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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.
-- 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 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.
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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.
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. 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.
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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
of 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.
Employees
At December 31, 1999, we employed approximately 58 full-time employees, 24
of whom were management and administrative personnel, 10 of whom were clerical
personnel and 24 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 our 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.
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 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.
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Legal Proceedings
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration issued willful citations and notifications of penalty in
the amount of $147,000 against us 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 us 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 IDM 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 us, is without merit and
continue to vigorously contest the cause of action. Pursuant to our subcontract
with American Wrecking, we are now being defended and indemnified by the
insurance carrier for American Wrecking.
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 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.
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.
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BUSINESS AND PROPERTIES OF FUSION NETWORKS
Corporate Overview
Fusion Networks, Inc. was incorporated in the State of Delaware under the
name LatinEyes.com, Inc. in July 1999. Later in July 1999, the name of the
company was changed to Fusion Networks, Inc.
Fusion Networks is a start-up Internet company founded to provide improved
Internet content and services to Latin American markets and to the Spanish and
Portugese speaking population around the world. Fusion Networks launched its
Internet site, LatinFusion.com, on a pilot basis, in Bogota, Colombia in October
1999, and launched a site in Miami in January 2000 with a formal international
launch of the Miami site planned for February 2000 followed by similar launches
in targeted cities and regions in the Americas and Europe.
Fusion Networks' offices are located at 8115 N.W. 29th Street, Miami,
Florida 33122, telephone number (305) 477-6701.
Industry Background
Development of the Internet. The Internet is a global network of
interconnected, separately administered public and private computer networks
that enables commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information, provide
entertainment and conduct business remotely. Use of the Internet has grown
rapidly since the start of its commercialization in the early 1990's. According
to International Data Corporation, there were an estimated 104.4 million
Internet users at the end of 1998 with that number estimated to grow to 510
million by 2003, a 388% increase. This rapid growth in the popularity of the
Internet is due in large part to increasing computer and modem penetration,
development of the Web, the introduction of easy-to-use navigational tools and
utilities, and the growth in the number of informational, entertainment and
commercial applications available on the Internet. Technological advances
relating to the Internet have occurred and continue to occur rapidly, resulting
in more robust and lower cost infrastructures, improved security and increased
value-added services and content. Growth in client/server computing, multimedia
personal computers and online computing services and the proliferation of
networking technologies have resulted in a large and growing group of people who
are accustomed to using networked computers for a variety of purposes, including
e-mail, electronic file transfers, online computing and electronic financial
transactions. These trends have led businesses increasingly to explore
opportunities to provide Internet based applications and services within their
organization and to customers and business partners.
World Wide Web. An important factor in the widespread adoption of the
Internet has been the emergence of a network of servers and information
available called the World Wide Web. The Web is a network of medium rich in
content, activities and services. Content on the Web includes, among other
things, magazines, news feeds, radio broadcasts, and corporate, product,
educational, research, and political information, as well as activities,
including chat and Web communities and customer services, including
reservations, banking, games and discussion groups.
The rapid deployment of the Web has introduced fundamental changes in the
way information can be produced, distributed and consumed, lowering the cost of
publishing information and extending its potential reach. Companies from many
industries are publishing product and company information or advertising
materials and collecting customer feedback and demographic information
interactively. The structure of Web documents allows an organization to publish
significant quantities of information while simultaneously allowing each user to
view selected information that is of particular interest in a cost effective and
timely fashion.
Latin American and Spanish/Portugese Language Growth Opportunities. Fusion
Networks believes that the Latin American and Spanish/Portugese speaking
Internet markets are a largely untapped market which offers excellent growth
opportunities.
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The Spanish and Portugese speaking population is concentrated in Latin
American countries, with a total combined population of approximately 500
million, with additional substantial Spanish and Portugese speaking populations
in Europe, principally in Spain and Portugal, as well as in the United States.
Although divided by geographical and political boundaries, the Spanish and
Portugese speaking population share many cultural affinities, including common
languages and religions, as well as a similar heritage. A majority of that
population speaks only Spanish or Portuguese, with only a small portion of the
population being proficient in English.
Because of language barriers, Internet usage in the Spanish and Portugese
speaking populations has lagged behind usage in the English speaking population.
According to a May 1999 article in The Economist, 78% of all websites were in
English and 96% of e-commerce websites were in English. According to Zona
Financieria, only 2% of websites are in Spanish or Portugese. These language
barriers have substantially impeded growth in Internet usage in the Spanish and
Portugese speaking population.
While Internet usage in Spanish and Portugese speaking populations is in an
early stage of development compared to the English speaking market, usage has
grown rapidly in recent years and is expected to continue to grow at a rapid
pace in the coming years. According to a Global Reach report, persons accessing
the Internet in Spanish and Portugese account for an estimated 19.3% of all
persons accessing the Internet in languages other than English. IDC estimated
that Internet usage in Latin America will grow from an online population of 5.7
million in 1998 to 24.3 million users by 2003. Additionally, there are
substantial Spanish and Portugese speaking populations outside of Latin America,
principally in the United States, Spain and Portugal. According to Global Reach,
in America alone there are 32 million people who speak a language other than
English at home with the primary language being Spanish.
Accompanying the growth in Internet users in Latin America and in the
Spanish and Portugese speaking populations of Europe and the United States, IDC
estimates regional compound growth in Latin American e- commerce of 117%
annually between 1998 and 2003, from $170 million in 1998 to more than $8
billion by the end of 2003.
The Internet as a Business Medium
The growth in the number of Internet users, the amount of time users spend
on the Internet, the increase in the number of Web sites and the rate of
Internet and PC penetration is being driven by the increasing importance of the
Internet as a content resource, advertising medium and platform for consumer
services.
Content Resource. New software-based authoring tools have lowered the cost
of publishing content on the Internet relative to conventional publishing models
and enable new, exciting forms of multimedia content. The cost of accumulating,
storing and delivering content to a large audience is lower than that of
conventional media, consisting only of the cost of maintaining and operating
computer equipment. Content is readily accessible by any Internet user and most
information is available free of charge. The Internet is also achieving
increasing popularity as an entertainment alternative. Through the wide array of
content offerings available from different Web sites, Internet users are able to
view photographs, video clips, listen to music, play interactive, real-time
games with third parties and communicate with friends.
Fusion Networks believes that through the operation of its portal network,
targeted at the Spanish and Portugese speaking audience, it will be able to help
satisfy their demand for Spanish and Portugese language content services.
Although Fusion Networks may not provide all the services that may be available
on the multitude of Web sites online, Fusion Networks believes that its
offerings, including locally produced Spanish and Portugese language content
services, online community products and e-commerce capabilities, will be
competitive against other Web sites providing similar services.
Advertising. Advertisers have identified the Internet as a means for mass
communication of their messages, similar in many respects to the use of
advertising in traditional media such as television and radio broadcasting and
print publishing. Fusion Networks believes advertisers have also recognized that
Web-based advertising may be more effective in a number of respects than
traditional media advertising. The Internet allows advertisers to present
messages to specific, targeted audiences, and to enable users to interact with
advertising information presented in Web pages. This characteristic of the
Internet also permits advertisers to measure more precisely the number of
impressions, or times that an advertisement appears in page views downloaded by
users,
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through verification by an independent third-party auditor. Advertisers can also
measure the effectiveness of advertising in generating "click-throughs," or user
requests for additional information made by clicking on the advertiser's banner
linking the user to the advertiser's Web site. Fusion Networks believes that
increases in transmission bandwidth through higher speed Internet connections,
and wider adoption of advanced content delivery technologies for the Internet,
such as Java, VRML and other multimedia enabling technologies, will increase the
functionality of advertising, and will make the Internet an even more attractive
advertising medium. Fusion Networks also believes technological developments may
result in greater ability to provide information and analysis about the
effectiveness of Internet advertising, the demographic profiles of users, as
well as the ability of advertisers to frequently modify and more closely tailor
their messages. This should result in more targeted, higher impact advertising
opportunities, and greater integration of Web-based advertising into the range
of marketing channels available to advertisers.
Although online advertising currently represents only a small percentage of
overall global advertising expenditures, Fusion Networks expects the broader
acceptance of the Internet as an advertising medium will increase online
advertising expenditures both globally and in the Spanish and Portugese speaking
markets. According to Forrester Research, online advertising expenditures are
expected to grow from $1.5 billion in 1998 to more than $15 billion in 2003,
with online advertising expenditures in Latin America expected to grow from $20
million in 1997 to $645 million in 2003. Additionally, Fusion Networks believes
that the targeted nature of online advertising will be an important benefit to
businesses seeking to maximize the efficiency of their advertising expenditures.
E-commerce. The Internet is dramatically affecting the methods by which
consumers and businesses are evaluating and buying goods and services, and by
which businesses are providing customer service. Businesses have sought to
capitalize on the Internet as a platform for consumer services through the
establishment of Web sites devoted exclusively to the dissemination of
information relating to their products and services. Fusion Networks' web
solutions services will cater directly to such businesses seeking to expand
their consumer relations strategy online. Fusion Networks plans to provide
comprehensive solutions to its clients ranging from the design and development
of their Web site to strategic consulting of business strategies.
As part of providing web solutions services, Fusion Networks plans to
assist businesses seeking to conduct sales transactions directly to consumers
through e-commerce on their Web sites. The Internet provides online merchants
with the ability to reach a global audience and to operate with minimal
infrastructure, reduced overhead and greater economies of scale, while providing
consumers with a broad selection, increased pricing power and unparelleled
convenience. As a result, the volume of business transacted on the Internet is
anticipated to grow in significance. Globally, IDC projects that e-commerce
revenues will grow from $50.4 billion in 1998 to $1.3 trillion by 2003. Within
Latin America, IDC estimates regional compound growth in e-commerce revenues of
117% annually between 1998 and 2003, from $170 million in 1998 to more than $8
billion by the end of 2003.
The LatinFusion.com Strategy
LatinFusion.com is being developed as a universal portal offering a
comprehensive suite of Internet products, services and solutions to the Latin
American and Spanish and Portugese speaking markets. Fusion Networks believes
that by offering an integrated platform of content, community and commerce and
related services, all produced locally and in Spanish or Portugese with the
specific needs and desires of the Spanish and Portugese speaking population as
its focus, LatinFusion.com will be well positioned to capitalize on the
anticipated growth of the Internet throughout the Spanish and Portugese speaking
world.
In order to capitalize on the anticipated growth of the Internet in the
Spanish and Portugese speaking populations, Fusion Networks intends to:
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* Establish credibility in the Spanish and Portugese speaking markets by
establishing a local presence in those markets and developing content
tailored to those markets.
Because of important cultural and linguistic characteristics shared by much
of the Spanish and Portugese speaking population of the world, Fusion Networks
believes that success in serving the Internet needs of that community is tied to
establishing oneself as a part of that community and displaying a sensitivity to
the needs of that community. While some existing Internet providers locally
produce native language content for the Spanish and Portugese speaking
community, much of the content on the Internet which is available in Spanish or
Portugese is simply translations of English language content. Fusion Networks
believes that, in order to create loyalty and a sense of community among Spanish
and Portugese speaking Internet users, a Web site must contain content which is
(1) locally produced, and (2) produced in Spanish and/or Portugese.
Fusion Networks intends to establish and grow the LatinFusion.com site from
a local base in key markets which are expected to facilitate the establishment
of larger regional presences. Implementation of that strategy began with the
establishment of an initial presence in the Bogota, Colombia market to support
its initial pilot operations. Fusion Networks intends to establish the
infrastructure and local content development and support teams to ensure that
the LatinFusion.com site develops a reputation for quality, responsiveness and
reliability of both the Web site and related services. All content will be
produced locally and will be multi-cultural and multilingual, with all content
being available in Spanish, Portugese and English. Fusion Networks believes that
the combination of locally produced native language content with reliable
service will allow LatinFusion.com to become a recognized name and preferred Web
site for Internet users in each of its markets. Fusion Networks also believes
that the establishment of a favorable reputation in its core markets will allow
the LatinFusion.com site to quickly gain recognition and a favorable reputation
among Internet users in the surrounding region. Fusion Networks intends to
repeat this process by establishing infrastructure and a local content and
support team in key markets throughout Latin America as well as in certain key
markets in the United States and Europe.
* Offer a comprehensive range of Internet products and services tailored
to the Spanish and Portugese speaking markets.
Fusion Networks intends to facilitate user loyalty by providing a
comprehensive range of Internet products and services, all tailored to the needs
of the Spanish and Portugese speaking markets. The LatinFusion.com site is
initially divided into six channels, each offering a broad array of related
products and services. The channels include (1) home, where users can access
time, weather and currency data, search engines and a help desk, among other
data, (2) media, where users can access major national, regional and local
newspapers, regional magazines and regional television and radio broadcasts, (3)
guides, where users can access community, entertainment and tourist information
for selected regions and cities, (4) commerce, where users can access a wide
variety of on-line shopping options, on-line banking and on-line investment
options, among other products and services, (5) games, where users can access
interactive games, and (6) connection, where users can access e-mail, video
chat, Internet telephone services and other communication tools. A contest
channel is expected to be added where users can participate in various contests.
Fusion Networks will constantly monitor new products and services and user
demand for those products and services and will add such products and services
to assure that users have the broadest range of Internet products and services
available.
* Utilize state-of-the-art technologies to improve the Internet
experience.
Since the inception of the Internet, users have suffered through bandwidth
limitations which have contributed to the predominance of slow, non-dynamic and
static sites. As a result, Fusion Networks believes that much of the Internet
can be characterized by its lack of interactivity and by boring sites. Fusion
intends to continually adopt the latest technologies to both overcome bandwidth
limitations and provide the richest, most entertaining multimedia experience
available on the Internet. LatinFusion.com has been designed using Macromdia's
Flash 4.0 which will offer streaming video, interactive on-screen graphics and
full stereo sound throughout the site. Fusion Networks believes that the
adoption of this technology will allow LatinFusion.com to differentiate itself
from many of the sites on the Internet and make LatinFusion.com an exciting and
enjoyable Web site to visit. Fusion Networks will constantly monitor new
technologies and will, to the extent available, adapt new technologies as
necessary to assure that LatinFusion.com offers the richest and most attractive
Internet experience available.
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* Deploy innovative new advertising strategies to better serve both
users and advertisers.
Advertising on the Internet presently consists, almost exclusively, of the
placement of banners on Web sites which are linked to an advertiser's Web site.
These banners, like traditional advertising medium, are designed to increase
brand awareness, attract new customers and facilitate sales of products and
services.
Fusion Networks has adopted a new, non-banner, advertising model which it
believes will be better received by both Web users and by advertisers. Utilizing
Macromedia Flash 4.0, Fusion Networks will produce "infomercials" which are ten
seconds or less in length and which include full multimedia, including graphics,
sound and voice. Infomercials will be highly customized and targeted based on
the user demographics associated with the Web page being viewed. Each
infomercial will be downloaded in the background while the Web page is being
viewed and will run between page views. Fusion Networks believes that this
advertising model is similar to highly targeted television advertising, which is
a proven and long standing means of advertising, and will produce superior
results to banner advertising. Fusion Networks will support its advertisers by
making available real-time statistical data, including viewing time, viewer
demographics, "click-throughs" and related information.
* Establish strong strategic alliances with media, business and
government partners to develop and promote LatinFusion.com.
In order to increase traffic, build market and extend the LatinFusion.com
brand internationally, Fusion Networks intends to pursue strategic relationships
with prominent, internationally recognized media and business partners who offer
quality content, technology and distribution capabilities as well as marketing
and cross- promotional opportunities.
LatinFusion.com Products and Services
Portal Content
LatinFusion.com is being organized to meet the content, community and
commerce needs of Spanish and Portugese language Internet users. Users will be
able to access the site in Spanish, Portugese or English and change languages
instantly. Users will also be able to access information, products and services
at the local, regional or global levels. The site is being organized around
seven channels, each of which will be accessed for free. This basic structure
will serve as a platform for creating a rich variety of online products and is
expected to be an attractive host to online advertisers.
LatinFusion.com will provide a one-stop gateway to the Internet that
aggregates, organizes and delivers information to meet the needs of users
interested in localized information pertaining, and of interest, to the Spanish
and Portugese speaking populations of Latin America, the United States, Spain
and Portugal.
Within the LatinFusion.com site, information is organized in channels.
Channels are a standard Internet feature which provides users with an efficient
and easy way to explore and utilize the wealth of content on the Internet
through the use of guides, directories and the categorization of information.
The initial channels planned for LatinFusion.com are grouped as follows:
- Home
- Media
- Guides
- Commerce
- Connection
- Games
- Contests
Home. The Home channel -- www.LatinFusion.com-- is the gateway to the
portal and hosts general user information. From the Home channel, users will be
able to select the language in which content is to be presented and specify a
geographic area of interest. The Home channel will also provide certain basic
tools to the user, including:
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-- Help Desk. Users will be able to obtain assistance in using the site
and surfing the Web.
-- Search Engine. Users will be able to utilize major search engines to
search for information on specific topics on the Internet or on the
LatinFusion site. Searches will be performed in Spanish, Portugese or
English, as determined by the user.
Media. The Media channel will allow the user to access major media
information at the city, country or Americas level, as selected by the user.
Based on the geolayer selected, appropriate media will be displayed, including:
-- Newspapers. Fusion Networks plans to provide its users the latest news
at the worldwide, Americas, country and city level, as determined by
the user.
-- Television. Fusion Networks plans to allow users to view real-time
television broadcasts, with closed-captions in Spanish, Portugese or
English, as determined by the user, and delayed television newscasts
covering topics selected by the user.
-- Radio. Fusion Networks plans to allow users to listen to live
broadcasts of news or music.
-- Magazines. Fusion Networks plans to provide its users with the latest
issues of popular magazines.
Guides. The Guide channel will allow users to access city, county or region
specific guides to tourist, entertainment, government and similar information.
Based on the geolayer selected, appropriate information will be displayed,
including:
-- Tourist Information. Users will be able to access comprehensive
tourist information relating to specific cities, countries or regions
served by LatinFusion.com, including information regarding popular
tourist sites, restaurants, clubs and other attractions. Maps will be
provided along with multimedia displays of scenery, restaurant
interiors, and restaurant menus among other items. The site is
expected to include restaurant reservations and attractions ticketing
capabilities.
-- Entertainment Information. Users will be able to access comprehensive
entertainment information for specific cities, including concerts,
sporting events, movies, cultural events and other ongoing events in
the cities served by LatinFusion.com. The site will also include
numerous pages devoted to popular local themes and personalities,
including local traditions, local sports teams and sports and
entertainment personalities of local interest.
-- Government Information. Users will be able to access comprehensive
governmental information for specific cities, countries and regions
served by LatinFusion.com, including information relating to the
various agencies having authority over various aspects of life in the
city, country or region, rules and laws applying in the city, county
or region and how to contact the various agencies.
-- Community Information. Users will be able to access comprehensive
information relating to traditions, customs, rules, regulations and
local services in communities served by LatinFusion.com.
-- Calendar Information. Users will be able to access city, country and
region specific calendars for the areas served by LatinFusion.com,
which calendars will include detailed holiday information for each
area.
Commerce. The Commerce channel will allow users to perform secure Internet
transactions utilizing the latest Internet technology. Within Latin American
countries, Fusion Networks plans to initially concentrate e- commerce activities
within a locale or country, developing strong relations within each country
served by LatinFusion.com and avoiding potential problems of cross-border
e-commerce transactions. E commerce options available to users will include:
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-- Virtual Mall. Users will be able to purchase goods and services from
e-commerce partners in cities and countries served by LatinFusion.com.
Fusion Networks is presently negotiating with a large number of name
brand and specialty manufacturers, distributors and stores to offer
their products and services, including music, CD's, videos, books and
magazines, beauty and pharmaceutical products, travel and tourism
services, toys and games, clothing and shoes, and furniture, among
other products.
Because of unique payment systems in Latin America, Fusion Networks is
structuring its e- commerce operations to accept both debit card payment,
which is more common and more secure in Latin America, and credit card
payment, which is not as prevalent or secure in Latin America.
-- E-Banking. Users will be able to make payments, transfer funds and
conduct other banking activities in a secure environment. Fusion
Networks is presently negotiating with a major bank in Colombia, and
plans to negotiate with major banks in each region served by
LatinFusion.com, to act as its e-banking partner.
-- E-Stock. Users will be able to buy and sell stocks, track portfolios
and obtain market information and research in a secure environment.
Fusion Networks is presently negotiating with brokerage firms to act
as its e-stock partner.
-- E-Auction. Users will be able to buy and sell products at auction in a
secure environment.
-- E-Expo. Users will be able to post and view information on all major
trade shows in cities and regions served by LatinFusion.com.
Connection. The Connection channel will allow users to interact with
specific users or with other users sharing similar interests. Connection
options available to users will include:
-- Video Chat. Users can create "virtual communities" where participants
can interact in group or one-on-one discussions in Spanish, Portugese
or English. Chat room communities vary in topics, ranging from sports,
politics and movies to current events. LatinFusion.com chat rooms are
expected to support real-time video images of up to twelve users at
once. Additionally, Fusion Networks is working with technology
providers to permit discussions in multiple languages with real-time
translation between Spanish, Portugese and English.
-- E-Mail. Registered users will be provided with free e-mail accounts in
Spanish, Portugese and English. E-mail users will be able to access
electronic mail from any computer with a standard Web browser.
Providing this service is expected to increase user loyalty and
therefore, increase traffic on the LatinFusion.com network.
-- E-Card. Users will be able to create and send interactive greeting
cards to friends and family from a list of multimedia cards.
-- E-Poll. Users will be able to express their opinions on current topics
ranging from arts to politics and to view poll results.
-- WebCam. Users will be able to view places of interest through the use
of strategically placed cameras throughout the cities served by
LatinFusion.com.
-- E-Phone. Fusion Networks is working with technology companies to
develop and offer computer-to-telephone call capabilities at minimal
cost between any of the cities served by LatinFusion.com.
Games. The Game channel will allow users to play a variety of
interactive multimedia games by themselves or against other users in the
network.
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Contests. The Contest channel will allow users, where permitted by law, to
participate in contests and compete for prizes.
E-Commerce Services
LatinFusion.com will provide e-commerce services through its Commerce
channel as an extension of its portal network. Currently, the development of
e-commerce is in its infancy in Latin America compared to the United States. The
principal barrier to development of e-commerce in Latin America has been the
development of a secure online payment systems since credit cards are not
commonly accepted in Latin America.
In order to accommodate the use of debit cards, which are a more prevalent
form of payment in Latin America than credit cards, LatinFusion.com employees
SET, a secure debit card payment system developed by VISA and Master Card, in
addition to SSL, a secure credit card payment system.
With the implementation of secure payment systems and the anticipated
development of a loyal and growing user base and site traffic, LatinFusion.com
is expected to be an attractive host to a wide base of merchants seeking to sell
goods and services over the Internet. Fusion Networks expects to form alliances
with a broad array of manufacturers, merchants, auction operators, banks and
financial service companies to create links and traffic to their sites.
E-commerce partners are expected to typically pay a flat fee for placement on
the LatinFusion.com network. Fees are expected to be based on location of links
that allow for entry into online stores and the number of links present
throughout the network. These partners are also expected to share with Fusion
Networks a percentage of transaction revenues generated when LatinFusion.com
users purchase their products or services.
Advertising Services
The Internet has become a new means of communication, marketing and
distribution for the advertising industry. Advertisers and advertising agencies
typically enter into agreements under which they pay for a guaranteed number of
impressions for a fixed fee. These agreements typically range from one month to
multiple years. Currently, advertising on the Internet consists primarily of
banner-style advertisements, buttons and sponsorships from which viewers can
hyperlink directly to the advertiser's own Web site. Networks typically
establish standard cost per thousand impressions, commonly referred to as CPMs,
for banner advertisements which varies depending on location of the
advertisements on the network, the targeted country and the extent to which it
is targeted for a particular audience. Discounts from standard CPM rates may be
provided for higher volume, longer-term advertising contracts.
Networks may also offer promotional advertising programs, such as contests,
sampling and couponing opportunities, in order to build brand awareness,
generate leads and drive traffic to an advertiser's site.
LatinFusion.com is implementing a new banner-free advertising platform
which Fusion Networks believes will provide an improved experience for network
users and superior results for advertisers. After studying existing Internet
advertising techniques, Fusion Networks determined that banner-style
advertisements produced poor results in terms of response rates and were often
an annoyance to network users. Based on that finding, Fusion Networks has
adopted a new advertising model utilizing full multimedia "infomercials". As
with banners, these infomercials will be placed based on site demographics so as
to target advertisements to appropriate network users. When a page in the
network fitting the proper demographic profile for a given product is viewed,
the infomercial will load in the background. When the user clicks to the next
page view, the infomercial will play. Infomercials are expected to incorporate
captivating and animated graphics, sound and voice and will typically last no
longer than ten seconds. As site traffic grows, Fusion Networks will gather
increasing volumes of user demographic information allowing it to develop highly
customized advertising programs which can be targeted to specific user
demographic profiles. For instance, users in Miami clicking on a site with
information on Bogota might see an infomercial from an airline providing a brief
commercial for flights between those cities.
Infomercials will be designed using MacroMedia Flash 4.0 with full
multimedia capabilities. Downloading of infomercials is expected to require
approximately the same time and utilize the same bandwidth as a typical banner.
However, unlike banners, the use of infomercials will provide users with a
cleaner, less cluttered site and will provide a more dynamic and visually
compelling advertising medium, similar to television.
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Advertisers will be supported by the use of technologies to collect
important data including viewing time, viewer demographics, click-through and
other data designed to measure the effectiveness of advertising efforts on the
network. Each advertiser will be provided access to a password protected site
where the advertiser will be able to obtain real time audience data.
Advertising models currently being utilized generally charge between $50
and $100 per CPM. Fusion Networks has not, as yet, set a fixed pricing structure
for advertising services. However, given the anticipated superiority of the
LatinFusion.com advertising model and anticipated strong demand for the same,
Fusion Networks believes that it will be able to charge advertising fees at or
near the high end of current CPM rates.
At January 15, 2000, five companies advertised on the LatinFusion.com site.
Network Launch and Channel Development Schedule
Network Launch Schedule
Initial Pilot Site Launch -- Bogota, Colombia. Fusion Networks launched its
initial site, on a pilot basis, in Bogota, Colombia in October 1999. Fusion
Networks developed and carried out an exhaustive infrastructure investment and
public relations campaign to coincide with the launch of LatinFusion.com in
Bogota.
In advance of the pilot site launch in Bogota, Fusion Networks made
infrastructure investments to support the launch and ongoing operation of the
site in Bogota. Those investments consisted principally of technology and
people. Technology investments included the purchase of a series of servers, and
related software and telecommunications equipment, which will support up to
500,000 users. A local team was assembled to provide for customer service,
technology support, content production and sales and marketing necessary to
launch and support the ongoing operations of LatinFusion.com in Bogota.
The public relations campaign conducted in conjunction with the Bogota site
launch included:
-- a series of interviews, articles and reviews arranged by a
professional public relations firm regarding LatinFusion.com in
advance of the launch date.
-- a large cross promotional public relations program with a major
Colombian newspaper and magazine.
-- targeted radio, newspaper and magazine advertising, including buying
advertising space in the largest circulation daily newspaper, the
second largest circulation magazine in Colombia, and on a Bogota radio
station having national coverage and also heard in Miami.
-- targeted purchases of banner advertising on key Internet portals.
-- sponsorship of contests to stimulate visits to LatinFusion.com.
-- sponsorship of a major annual rock concert to be held in Bogota the
weekend of October 8 celebrating the discovery of America.
-- hosting a reception for clients, media and celebrities at an exclusive
business club to celebrate the launch of LatinFusion.com.
Additional Site Launches. Latin Fusion plans to duplicate the Bogota site
launch in fifteen major markets with significant Spanish and Portugese speaking
populations over a twelve month period following the Bogota launch. Each new
site launch will be supported by a local satellite office and a region specific
site. Each site will be responsible for generating and maintaining local content
and generating and supporting local advertising and e- commerce. The site launch
dates, or scheduled site launch dates, are as follows:
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* Miami, Florida January 2000 (formal international launch
scheduled February 2000)
* Mexico City, Mexico March 2000
* Sao Paulo, Brazil March 2000
* Buenos Aires, Argentina March 2000
* Madrid, Spain March 2000
* Santiago, Chile June 2000
* New York, New York June 2000
* San Juan, Puerto Rico June 2000
* Lisbon, Portugal June 2000
* Chicago, Illinois September 2000
* Houston, Texas September 2000
* Los Angeles, California September 2000
* Caracas, Venezuela September 2000
* Rio de Janeiro, Brazil September 2000
* Toronto, Canada September 2000
Following the scheduled site launches, Fusion Networks will evaluate and,
where appropriate, launch additional sites in the Americas, Spain and Portugal.
The launch of additional sites is dependent upon the availability of adequate
financial resources to support each site launch.
Channel Development Schedule
While Fusion Networks plans to offer each of the channels described above
and to replicate the LatinFusion.com format in each region served by the site,
the development and introduction of the channels will take place over a period
of time. Channel development activities are expected to require between 45 and
120 days per channel. Based on the current state of channel development
activities, channels have been introduced, or it is anticipated that channels
will be introduced, on the following schedule:
* Home October 1999
* Media October 1999
* Guides October 1999
* Commerce October 1999 (partial)
* Connection October 1999 (partial)
* Games October 1999 (partial)
* Contests Undetermined
Actual channel development and introduction may vary and it is possible
that some channels will be introduced with basic features with additional
features added over time.
Content Development
Initial content development will be outsourced to local news media
companies. Those media sources will gather as much information as possible which
is pertinent to the market being served and will input that information into
templates supplied by Fusion Networks for inclusion on the LatinFusion.com site.
Fusion Networks will maintain an in-house content development team in each
region served by LatinFusion.com. The in-house content development team will
gather information as needed to fill in gaps in information provided by outside
media sources and to update information on the site. The outsourcing of initial
content development to media companies which access large pools of skilled
content developers is expected to facilitate the rapid development of
comprehensive site content while minimizing staffing costs. Fusion Networks
expects that each content development team will require approximately three
months to create and gather sufficient content to start-up a regional site.
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Technology Infrastructure
Fusion Networks' technology infrastructure has been designed, and is being
built, to ensure:
* quality of service, as measured by performance, reliability, security
and availability.
* quality of information, as measured by data storage and backup.
* scalability.
* bandwidth administration.
* administration, statistical monitoring and analysis and operations
Fusion Networks will maintain its central servers in its Miami offices.
Local servers will be installed in each region served by LatinFusion.com,
beginning in Bogota, Colombia. Both the central servers and the regional servers
will be designed for ease of capacity expansion and replication in other
regions. The central servers in Miami will also serve as back-up servers for
each of the regional servers. Each of the servers is being designed to satisfy
the following traffic, product and services specifications:
- -- Traffic Specifications
* total Internet users 500,000
* remote access users 300,000
* dedicated users 200,000
* maximum simultaneous users 5,000
- -- Product and Services Specifications
* content publication, including general information, news, Real Audio
and Real Video.
* e-mail.
* e-commerce.
* games.
* internet telephony.
* video conferencing.
The technology infrastructure will be administered and maintained by an
in-house technology staff with all facilities and servers being monitored 24
hours per day, 7 days per week. All facilities and technology will be protected
by implementation of security measures and by multiple uninterruptible power
supplies.
For reliability, availability, and serviceability, Fusion Networks will
implement an environment in which each server can function separately. Key
components of the server architecture are served by multiple redundant machines.
In-house and third-party monitoring software will be utilized. Reporting
and tracking systems will generate daily traffic, demographic, and advertising
reports. Production data will be copied to backup tapes each night.
In-house and third-party software will be utilized to monitor access to
production and development servers.
The network must accommodate a high volume of traffic and deliver
frequently updated information. Components or features of the network may be
susceptible to outages or slower response times because of equipment or software
downtime. These events could adversely effect Fusion Networks' business.
Marketing
Fusion Networks' marketing plan incorporates various components developed
to increase overall site traffic, increase brand awareness and loyalty, attract
advertising and e-commerce partners and maximize the value of advertising and
e-commerce transactions originating at the LatinFusion.com site.
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Fusion Networks' marketing plan includes the following components:
* Traditional, and non-traditional, media paid advertising.
Fusion Networks plans to purchase advertising in traditional media sources
such as television, radio, newspapers, magazines and billboards. Additionally,
banner advertisements in major search engines and key word, e-mail newsletter
and portal advertisements may be purchased. Traditional advertising media
purchases are expected to be primarily targeted in nature to maximize exposure
of the LatinFusion.com site among the principal users of Internet services based
on viewer, listener and reader demographics.
* Public relations.
Professional public relations firms will be retained to develop and assist
in regular public relations events designed to maximize the exposure of the
LatinFusion.com name. Public relations events undertaken by Fusion Networks may
include sponsorship of community, sporting and entertainment events.
Additionally, Fusion Networks' public relations firm will prepare regularly
scheduled news releases to keep the LatinFusion.com name in the public eye and
to update the public on developments at the site. Fusion Networks may also
attend selected industry and trade conferences to increase name brand
recognition within the industry.
* User data collection.
As an integral part of the ongoing operations and marketing efforts of
Fusion Networks, user data will be compiled to improve customer understanding
and develop demographic profiles. In order to gather user data, as users explore
the LatinFusion.com site, users will periodically be asked simple questions
prompted by introductions such as "in order to better serve you, please tell
us." Those data collection efforts will focus on (1) basic demographic data such
as age, occupation, income, place of residence, place of business, marital
status, etc., (2) actual purchase data, (3) "cookie data", consisting of user
interests, preferences, likes and dislikes, (4) registration data gathered when
users register for e-mail or other services, and (5) survey and question
responses. User profiles will be prepared based on such data. These profiles
can, in turn, be used to attract return visits through the development of highly
targeted content and to attract advertisers through targeted advertising
capabilities made possible by the profiles assembled.
Strategic Alliances
Fusion Networks is presently negotiating, and expects to continually be
involved in negotiations, with leading content, advertising, e-commerce and
technology companies to form strategic alliances. These alliances are intended
to enhance the LatinFusion.com network, increase traffic, attract new users,
provide additional revenue sources and secure access to advertising, technology
and services on favorable terms. Where possible, Fusion Networks may attempt to
negotiate long-term exclusive relationships with its alliance partners in the
markets served by LatinFusion.com.
Content alliances.
Content alliances are expected to be established with partners which will
allow Fusion Networks to display their content on the LatinFusion.com network
within one or many channels. Fusion Networks and its content alliance partners
will negotiate as to the content to be provided, licensing or placement fees
payable between the parties and cross promotion of services.
Commerce alliances.
Electronic commerce alliances are expected to be established with partners
typically paying a fee for placement on the LatinFusion.com network. Fees are
expected to be based on location of links that allow for entry into their online
store and the number of links present throughout the network. These commerce
partners also share a percentage of transaction revenues generated when
LatinFusion.com users purchase their products or services.
At January 15, 2000, six companies had entered into e-commerce relationship
with Fusion Networks, including online retailers of toys, music, CDs and videos,
and greeting cards. Fusion Networks is presently in negotiations with a number
of potential e-commerce partners in the Latin American markets.
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Other Alliances and Strategic Investments.
In addition to efforts to establish basic content and e-commerce alliances,
Fusion Networks intends to negotiate with a wide variety of leading Internet
service and other technology companies to offer, market, distribute and promote
their technologies and incorporate those technologies into LatinFusion.com.
Technology alliances may be pursued with leading providers of Internet browsers,
streaming video/audio technology, search engines, online auctioneers, data
storage, software and other Internet enabling technologies.
- Marketing Services Group. In December 1999, Fusion Networks and MSGI
entered into a Stock Purchase and Sale Agreement pursuant to which Fusion
Networks issued 3,500,000 shares of common stock to MSGI in exchange for
1,500,000 shares of common stock of MSGI. Pursuant to the terms of that
agreement, MSGI has the right for a six month period ending in June 2000 to
acquire up to an additional 3,500,000 shares of common stock of Fusion Networks
in exchange for an additional 1,500,000 shares of MSGI common stock and MSGI has
the right to designate a nominee for director of Fusion Networks for a period of
one year. MSGI and Fusion Networks each agreed to "lock-up" the shares received
from the other preventing resale of those shares for a period of one year ending
December 2000. Additionally, the agreement provides that MSGI may rescind the
transaction and put the shares back to Fusion Networks if the merger with FNHI
is not completed by June 30, 2000.
In conjunction with the Stock Purchase and Sale Agreement, Fusion Networks
retained the services of WiredEmpire, MSGI's database marketing and
infrastructure subsidiary, to provide e-relationship tools and solutions to
accelerate deployment of Fusion Networks' business.
Competition
Competition among Web sites and online destinations for visitors,
advertisers and electronic commerce, and the accompanying revenue streams, is
intense and is expected to increase because of the lack of substantial barriers
to entry into the market. There are many companies that provide Web sites and
online destinations targeted to Latin Americans and Spanish and Portuguese
speaking people in general. Many of the competitors in the market have, and new
competitors may have, greater name recognition, greater financial, technical and
marketing resources, longer operating histories and larger customer bases
allowing them to undertake more extensive marketing campaigns for their brands
and services, adopt more aggressive advertising pricing policies, develop and
use superior proprietary technology platforms to deliver their products and
services, and make more attractive offers to potential employees, distribution
partners, commerce companies, advertisers and third-party content providers.
Fusion Networks' business, financial conditions and operating results could
be adversely impacted by competitive pressures which could produce lower
advertising rates, price reductions and lower profit margins, loss of visitors,
reduced page views and loss of market share.
Fusion Networks believes that the principal competitive factors affecting
its business are name recognition, quality of content, ease of use, technology
performance and functionality, quality of user support, number and quality of
value-added services and strategic marketing and technology alliances.
Fusion Networks will compete with providers of content and services over
the Internet, including Web directories, search engines, content sites, Internet
service providers and sites maintained by government and educational
institutions. The principal anticipated competitors of Fusion Networks include
companies targeted specifically to the Latin American and Spanish/Portugese
speaking markets such as StarMedia, El Sitio, Ciudad Futura, Telefonica/Ole and
Yupi, and Spanish and Portugese language versions of U.S. services such as
Yahoo!, America Online and Prodigy. There are also a number of companies which
target specific countries within Latin America. Among the various competitors in
the market, Fusion Networks believes that its principal competition will come
from sites which produce content locally in native languages. Fusion Networks
believes that it is well positioned with respect to those competitors as
LatinFusion.com is the only known site which has a strong multimedia component.
Notwithstanding the believe of Fusion Networks that it can favorably
compete with existing competitors in the market, competitors may develop content
that is better than Fusion Networks' or that achieves greater market acceptance.
It is also possible that new competitors may emerge and acquire significant
market share. This could have a material and adverse effect on the business,
financial condition and results of operations of Fusion Networks.
LatinFusion.com will also compete with traditional forms of media, like
newspapers, magazines, radio and television for advertisers and advertising
revenue. If advertisers perceive the Internet or the LatinFusion.com network to
be a limited or an ineffective advertising medium, they may be reluctant to
devote a portion of their advertising budget to Internet advertising or to
advertising on the network.
Latin American Telecommunications Infrastructure
Many of the largest markets in Latin America, including Argentina, Brazil,
Chile, Colombia and Mexico, have privatized and begun to deregulate their
telephone industries. As a result, many Latin American telephone companies in
recent years have undertaken significant investments in their infrastructure.
These investments have resulted in an improvement in the quality of telephone
service in these countries. In addition, deregulation has had a direct impact on
the cost and quality of Internet access as competition has driven down both
monthly access fees and per minute usage charges.
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Internet service providers, or ISPs, in Latin America typically charge
monthly fees for basic Internet access. In addition to access charges, local
calls to connect to the ISP typically include per minute charges. These per
minute charges, which are in addition to access charges, may make total cost of
Internet access substantially greater in Latin America than in the United
States, where users typically only pay a monthly access fee and nominal local
charges, if any. Long distance charges, if required, would make the total cost
of Internet access in Latin America even greater.
According to the IABIN Conference, monthly ISP access fees have decreased
to a range of approximately $25-$40 per month in the principal Latin American
markets. While per minute charges have not declined as rapidly, Fusion Networks
believe that they will trend downward as the effects of deregulation spread.
Because Fusion Networks' target market consists of a relatively affluent part of
the population across Latin America, it does not believe that Internet access
costs are a significant deterrent for many of its prospective users. However, if
rates were to increase substantially or fail to decline in the future, the
number of visitors to the network may decline or fail to grow.
The majority of Latin Americans access the Internet via traditional analog
dial-up accounts. Digital access is still relatively expensive and is not widely
available throughout Latin America. Fusion Networks does not believe that the
quality of telephone service will be a deterrent to the number of users that
visit its network.
Government Regulation and Legal Uncertainties
To date, regulations have not materially restricted use of the Internet in
our markets. However, the legal and regulatory environment that pertains to the
Internet is uncertain and may change. New laws and regulations may be adopted.
Existing laws may be applied to the Internet and new forms of electronic
commerce. Uncertainty and new regulations could increase costs and prevent
Fusion Networks from delivering its products and services over the Internet.
Uncertainty and new regulations could also slow the growth of the Internet
significantly. This could delay growth in demand for Fusion Networks' network
and limit the growth of revenues. New and existing laws may cover a broad range
of issues, including, but not limited to, sales and other taxes, user privacy,
pricing controls, characteristics and quality of products and services, consumer
protection, cross-border commerce, libel and defamation, copyright, trademark
and patent infringement, pornography, and other claims based on the nature and
content of Internet materials.
Intellectual Property and Proprietary Rights
Fusion Networks regards copyrights, service marks, trademarks, trade
secrets and other intellectual property as critical to its success. While Fusion
Networks does not presently hold any copyrights, service marks or trademarks, it
expects to rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with employees, customers, partners
and others to protect intellectual property rights. Despite such precautions, it
may be possible for third parties to obtain and use intellectual property
without authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries is uncertain
and still evolving. The laws of some foreign countries do not protect
intellectual property to the same extent as do the laws of the United States.
Fusion Networks intends to pursue the registration of trademarks in the
United States and internationally in Latin America, Spain and Portugal. It may
not, however, be able to secure adequate protection for such trademarks in the
United States and other countries. Effective trademark protection may not be
available in all the countries in which Fusion Networks conducts business.
Policing unauthorized use of marks is also difficult and expensive. In addition,
it is possible that competitors will adopt product or service names similar to
Fusion Networks', thereby impeding its ability to build brand identity and
possibly leading to customer confusion.
In order to protect its marks against similar and confusing marks of third
parties, Fusion Networks intends to using a watch service which identifies
applications to register trademarks, filing oppositions to third parties'
applications for trademarks which are similar or confusing, and bringing
lawsuits against infringers.
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Many parties are actively developing chat, homepage, search and related Web
technologies. Developers of such technologies can be expected to take steps to
protect these technologies, including seeking patent protection. There may be
patents issued or pending that are held by others and that cover significant
parts of Fusion Networks' technology, business methods or services. Disputes
over rights to these technologies may arise in the future. Fusion Networks
cannot be certain that its products and services do not or will not infringe
valid patents, copyrights or other intellectual property rights held by third
parties. Fusion Networks may be subject to legal proceedings and claims from
time to time relating to the intellectual property of others in the ordinary
course of its business. In the event that Fusion Networks determine that
licensing this intellectual property is appropriate, it may not be able to
obtain a license on reasonable terms or at all. Fusion Networks may also incur
substantial expenses in defending against third-party infringement claims,
regardless of the merit of these claims. Successful infringement claims against
Fusion Networks may result in substantial monetary liability or may prevent the
company from conducting all or a part of its business.
Fusion Networks also intends to continue to license technology from third
parties, including Web-server and encryption technology. The market is evolving
and Fusion Networks may need to license additional technologies to remain
competitive. Fusion Networks may not be able to license these technologies on
commercially reasonable terms or at all. In addition, it is possible that
licensed technologies may not be successfully integrated into Fusion Networks'
services. The inability to obtain any of these licenses could delay product and
service development until alternative technologies can be identified, licensed
and integrated.
Employees
As of December 31, 1999, Fusion Networks had 28 full-time employees, of
whom 5 were officers and administrative personnel and 4 worked in sales and
marketing. From time to time, Fusion Networks may employ independent contractors
to support its research and development, marketing, sales and editorial
departments. None of Fusion Networks' personnel are represented under collective
bargaining agreements. Fusion Networks considers its relations with employees to
be good.
Facilities
Fusion Networks' principal executive offices are located in approximately
1,600 square feet of office space in Miami, Florida, under a lease that expires
in June 30, 2000. Fusion Networks also leases a sales and business development
office space in Bogota, Colombia and plans to lease additional sales and
business development offices in each city in which LatinFusion.com is launched.
Legal Proceedings
There are no material legal proceedings pending or, to the knowledge of
management, threatened against Fusion Networks.
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MANAGEMENT
Directors and Executive Officers of FNHI
Pursuant to the terms of the merger agreement, three persons designated by
Fusion Networks and two persons designated by IDM will be nominated for election
to the board of directors of FNHI following the merger. Additionally, it is
anticipated that selected officers of Fusion Networks and IDM immediately prior
to the merger will serve as officers of FNHI following the merger. The following
table sets forth certain information concerning the nominees for director and
proposed executive officers of FNHI following the merger:
Name Age Position following merger
------ ----- ----------------------------
Hernando Bahamon 42 President, Chief Executive Officer and Chairman
Enrique Bahamon 37 Chief Financial Officer and Director
Felipe Santos 43 Director
Frank A. Falco 66 Director
Joel A. Freedman 64 Director
Traci Hammes 35 Director
J. Jeremy Barbera 43 Director
All directors will hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Each of the officers of FNHI will provide services to FNHI on a full time
basis. Other than officers who are subject to employment agreements, each
officer serves at the discretion of the Board of Directors. See "Employment
Contracts, Termination of Employment and Change in Control Arrangements."
The following is a biographical summary of the business experience of the
directors, nominees for director and proposed executive officers of FNHI.
Hernando Bahamon. Mr. Bahamon founded, and since July 1999, has served as
Chairman, President and Chief Executive Officer of Fusion Networks. Following
the merger, Mr. Bahamon will serve as Chairman, President and Chief Executive
Officer of FNHI. Prior to founding Fusion Networks, Mr. Bahamon served as Chief
Operating Officer of Red Colombia, an information technology company from 1997
to June 1999. Previously, Mr. Bahamon was a partner and manager of Electronic
Market, an on-line home electronics merchant, from 1995 to 1997.
Enrique Bahamon. Mr. Bahamon has served as Chief Financial Officer of
Fusion Networks since July 1999. Following the merger, Mr. Bahamon will serve as
Chief Financial Officer and a Director of FNHI. Since November 1988, Mr. Bahamon
has served as President and an owner of Latam Computer, a computer distributor.
Felipe Santos. Mr. Santos has served as a Director of Fusion Networks since
July 1999 and has consented to serve as a Director of FNHI following the merger.
Mr. Santos has served as President of Dinamo Ltda., an event production company,
since November 1998, as a Director of Live Marketing, a corporate marketing
company, since August 1999, as Manager of S.L.S., a concert promoter, since June
1997, and as Manager of Montoya, an auto racing company, since 1995.
Frank A. Falco. Mr. Falco co-founded, and since 1978, has served as a
director of IDM. Mr. Falco has served as Executive Vice President and Secretary
of IDM since 1978 and has served as Chairman of the Board and Chief Operating
Officer of IDM since June of 1993.
Joel A. Freedman. Mr. Freedman co-founded, and since 1978, has served as a
director of IDM. Mr. Freedman has served as President and Chief Executive
Officer of IDM since 1978 and served as Chairman of the Board from 1978 until
June of 1993.
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Traci Hammes. Ms. Hammes has served as a Director of Fusion Networks since
October 1999 and has consented to serve as a Director of FNHI following the
merger. Since July 1999, Ms. Hammes has served as an independent business
consultant providing financial and investor relations services. Previously, from
February 1999 to June 1999, Ms. Hammes served as Director of Business
Development for Pavana LLC, a start-up software development company. Prior to
joining Pavana, Ms. Hammes served as Director of Investor Relations for
Neuromedical Systems, Inc., a publicly traded medical devise/biotechnology
company from 1994 to 1998.
J. Jeremy Barbera. Mr. Barbera has been designated as a nominee for
Director of FNHI pursuant to the terms of a Stock Purchase and Sale Agreement
between Fusion Networks and MSGI. Mr. Barbera has served as Chairman and Chief
Executive Officer of MSGI since April 1997 and was President of MSGI from April
1997 to May 1999 and was a Director and Vice President of MSGI from October 1996
to April 1997. He has been Chief Executive Officer of Metro Direct, a systems
integration services provider and wholly-owned subsidiary of MSGI, since its
formation in 1987. Mr. Barbera has eighteen years of experience in data
management services, and over twenty years of experience in the entertainment
marketing area. Mr. Barbera is a director of Greatergood.com. See "Business and
Properties of Fusion Networks - Strategic Alliances - Other Alliances and
Strategic Investments - Marketing Services Group, Inc."
Officers and Key Employees of Fusion Networks
In addition to the foregoing directors and executive officers of FNHI, some
of whom are also officers and directors of Fusion Networks, the following
persons are officers or key employees of Fusion Networks:
George Fournier joined Fusion Networks as Chief Operating Officer in
December 1999. Prior to joining Fusion Networks, from February 1999 to December
1999, Mr. Fournier was President of International Network of Friends, a producer
and distributor of virtual conferences in the Latin American market. Mr.
Fournier was Vice President of International Business Development of
Mecklermedia Corporation, a publisher of Internet industry, business development
and technical news and information, from April 1996 to January 1999. From
September 1988 to April 1996, Mr. Fourneir was Director of International
Operations at Interface Group/Softbank Comdex a marketer of Internet products
and services.
Ruth Gaviria joined Fusion Networks as Vice President of Marketing and
Sales in October 1999. Prior to joining Fusion Networks, Ms. Gaviria was
Director of Hispanic and Asian Marketing for Colgate Palmolive from 1992 to
1999.
Jose Aberg-Cobo joined Fusion Networks as Vice President of Business
Development in October 1999. Prior to joining Fusion Networks, Mr. Aberg-Cobo
was Director of Business Development for Latin American for the McGraw-Hill
Companies from 1997 to 1999. From 1992 to 1995, Mr. Aberg-Cobo was a Senior
Investment Banking Associate at Citibank. From 1990 to 1992, Mr. Aberg-Cobo was
Strategic Planning Manager for Telefoncia de Argentina. Mr. Aberg-Cobo holds an
MBA from the Amos Tuck School of Business at Dartmouth College and an MS in
Industrial Engineering from the University of Buenos Aires.
Eduardo Cedeno joined Fusion Networks as Chief Technology Officer in
November 1999. Prior to joining Fusion Networks, Mr. Cedeno was employed by Red
Colombia for more than five years and served as Chief Technology Officer of Red
Colombia from 1996 to 1999.
Officers and Key Employees of IDM
In addition to the foregoing directors and executive officers of FNHI, some
of whom are also officers and directors of IDM, the following persons are
officers or key employees of IDM:
Michael Killeen has served as Treasurer and Chief Financial Officer of IDM
since 1991, and as a director of IDM since June 1998. Mr. Killeen previously
served as a director of IDM from 1991 to May 1996.
Frank Pasalano has served as Vice President of Operations of IDM since
1985. Previously, Mr. Pasalano served as a project manager for IDM from 1978 to
1985.
John M. Tuohy has served as Vice President of Nuclear Services of IDM since
1990. Previously, Mr. Tuohy served as Director of Burns & Roe, a national
engineering firm, from 1970 to 1990.
John Klosek has served as Vice President of Engineering of IDM since 1989.
Previously, Mr. Klosek served as Associate Director of Colgate Palmolive, a
conglomerate engaged in the worldwide production and marketing of consumer
goods, from 1969 to 1989.
Joe Dias has served as Vice President of Sales and Purchasing of IDM since
1979.
Birger Munck has served as President of IDM Energy since August of 1996.
Previously, Mr. Munck served as President of Continental Waste Conversion, Inc.,
a waste-to-energy project company from 1994 to July 1996. Previously, Mr. Munck
served as a management consultant from 1990 to 1993 and as President of Nordex
Petroleum from 1987 to 1990.
Relationships of Officers and Directors
Hernando Bahamon and Enrique Bahamon are brothers. Mr. Falco is the uncle
of Mr. Pasalano. Otherwise, there are no family relationships among any of the
directors or officers of FNHI, IDM or Fusion Networks.
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Compensation of Directors
FNHI has not, as yet, fixed the compensation payable to non-employee
directors for service in such capacity. It is anticipated that FNHI will fix
cash fees payable for service by outside directors as well as other forms of
compensation and expense reimbursements payable to non-employee directors.
Executive Compensation and Other Matters
IDM. The following table sets forth information concerning cash and
non-cash compensation paid or accrued for services in all capacities to IDM
during the three years ended December 31, 1999 of each of the five most highly
compensated executive officers of IDM.
<TABLE>
Long Term
Annual Compensation Compensation
------------------------------------------ -----------------
Other Annual Stock
Name and Principal Position Year Salary($) Bonus ($) Compensation ($) Options (#)(2)
- --------------------------- ---- --------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Joel A. Freedman........ 1999 480,000 -0- (1) 400,000
President and 1998 480,000 -0- (1) 225,000
Chief Executive Officer 1997 480,000 -0- (1) 10,000
Frank A. Falco.......... 1999 480,000 -0- (1) 400,000
Executive Vice President and1998 480,000 -0- (1) 225,000
Chief Operating Officer 1997 480,000 -0- (1) 10,000
Birger Munck............ 1999 175,000 -0- (1) 12,000
President - IDM Energy 1998 175,000 -0- (1) -0-
1997 175,000 -0- (1) -0-
Michael B. Killeen...... 1999 128,500 -0- (1) 19,500
Treasurer and Chief 1998 128,500 -0- (1) 2,500
Financial Officer 1997 123,084 -0- (1) 500
John M. Tuohy........... 1999 123,000 -0- (1) 14,000
Vice President of 1998 117,382 -0- (1) 1,000
Nuclear Services 1997 111,764 -0- (1) 0
</TABLE>
(1) Although the officers receive certain perquisites such as auto allowances
and company provided life insurance, the value of such perquisites did not
exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
(2) Reflects, retroactively, the effects of a 1-for-10 reverse stock split
effective April 16, 1999.
Fusion Networks. Fusion Networks was formed in July 1999 and no executive
officers received compensation in excess of $100,000 during 1999. Accordingly,
no historical information is provided as to compensation of executive officers.
Fusion Networks has fixed the salary of Hernando Bahamon, President and Chief
Executive Officer of Fusion Networks, at $180,000 annually and paid salary to
Mr. Bahamon of $105,000 during 1999.
Stock Option Plans
IDM. IDM adopted stock option plans in 1993, 1995 and 1998. The purpose of
the IDM Plans is to assist IDM and its subsidiaries in retaining the services of
and motivating employees by providing the opportunity for such personnel to
acquire a proprietary interest in IDM and thus share in its growth and success.
A total of 188,494 shares are reserved for issuance under the IDM Plans,
consisting of 41,212 shares reserved under the 1993 Plan, 47,282 shares reserved
under the 1995 Plan and 100,000 shares reserved under the 1998 Plan. The IDM
Plans provide for the granting of non-qualified stock options and "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986 to any employee, officer, director or consultant of IDM and its
subsidiaries. The 1998 Plan also permits the grant of restricted stock, stock
awards and performance shares. The Compensation Committee of IDM's board of
directors administers each of the IDM Plans. Members of that committee are
eligible to receive awards under the IDM Plans. The Committee designates
optionees, the exercise price of options (which may not be less than fair market
value on the date of grant), the date of the grant and the period of the option
(which may not exceed ten years).
112
<PAGE>
At December 31, 1999, a total of 1,030,272 options were outstanding under
the IDM Plans including options issued subject to shareholder approval.
Fusion Networks. Fusion Networks adopted a stock option plan in October
1999. The purpose of the Fusion Networks Plan is to assist Fusion Networks Plan
and its subsidiaries in retaining the services of and motivating employees by
providing the opportunity for such personnel to acquire a proprietary interest
in Fusion Networks and thus share in its growth and success. A total of
5,320,000 shares are reserved for issuance under the Fusion Networks Plan. The
Fusion Networks Plan provides for the granting of non-qualified stock options
and "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 to any employee, officer, director or consultant of Fusion
Networks and its subsidiaries. Fusion Networks' board of directors administers
the Fusion Networks Plan. Members of the board are eligible to receive awards
under the Fusion Networks Plan. The board designates optionees, the exercise
price of options (which may not be less than fair market value on the date of
grant), the date of the grant and the period of the option (which may not exceed
ten years).
At December 31, 1999, a total of 825,000 options were outstanding under the
Fusion Networks Plan.
Stock Option Grants
The following table sets forth information concerning the grant of stock
options made during 1999 to each of the Chief Executive Officer and the next
four highest paid officers of IDM:
<TABLE>
Percent of Potential Realizable Value
Total Options at Assumed Annual Rates
Granted to of Stock Price Appreciation
Options Employees Price Expiration For Option Term
Name Granted (1) Per Share (1) Per Share Date 5% 10%
-------- ------------ ------------- ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Freedman...... 400,000 41.0 1.156 7/18/09 10,369,600 16,785,600
Frank A. Falco........ 400,000 41.0 1.156 7/18/09 10,369,600 16,785,600
Michael B. Killeen.... 18,000 1.8 1.156 7/18/09 466,632 755,352
1,500 .1 6.75 2/10/09 30,495 54,555
Birger Munck.......... 12,000 1.2 1.156 7/18/09 311,088 503,568
John M. Tuohy......... 13,000 1.3 1.156 7/18/09 337,012 545,532
1,000 .1 6.75 2/10/09 20,330 36,370
</TABLE>
(1) Includes option grants under the 1998 Plan subject to approval by the
shareholders of IDM of an amendment to the 1998 Plan to increase the number
of shares reserved under the 1998 Plan. See "Proposed Amendment to IDM's
1998 Comprehensive Stock Option and Award Plan."
Stock Option Exercises
The following table sets forth information concerning the exercise of stock
options during 1999 by each of the Chief Executive Officer and the next four
highest paid officers of IDM and the number and value of unexercised options
held by the named officers at the end of 1999:
<TABLE>
Number of Unexercise Value of Unexercised
Shares Options at In-the Money Options
Acquired on Value at FY-End (#) at FY-End ($)(2)
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
-------- ------------ -------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Freedman.... 0 0 242,500 400,000 2,394,688 6,187,600
Frank A. Falco...... 0 0 242,500 400,000 2,394,688 6,187,600
Michael B. Killeen.. 0 0 17,504 9,000 223,198 139,221
Birger Munck........ 6,000 23,064 0 6,000 0 92,814
John M. Tuohy....... 0 0 11,505 6,500 149,973 100,549
</TABLE>
(1) Includes option grants under the 1998 Plan subject to approval by the
shareholders of IDM of an amendment to the 1998 Plan to increase the number
of shares reserved under the 1998 Plan. See "Proposed Amendment to IDM's
1998 Comprehensive Stock Option and Award Plan."
(2) Based on the fair market value per share of the Common Stock at year end,
minus the exercise price of "in- the-money" options. The closing price for
IDM's Common Stock on December 31, 1999 on the Nasdaq Small Cap Market
was $16.625.
113
<PAGE>
Stock Option Repricing
The following table sets forth all repricings of stock options held by the
Chief Executive Officer and each of the next four highest paid officers since
IDM's initial public offering in April 1994.
<TABLE>
Length of
Number of original
securities Market price Exercise option term
underlying of stock at price at time remaining at
options/ time of of repricing date of
SARs repricing or or New repricing or
repriced or amendment amendment exercise amendment
Name Date amended (#)(1) ($)(1) ($)(1) price ($)(1)(years/days)
------- ------ -------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Freedman 12/11/98 225,000 5.625 37.19 6.75 4/069
12/11/98 10,000 5.625 28.1875 6.75 3/224
12/11/98 7,500 5.625 20.00 6.75 1/325
05/22/97 7,500 15.625 40.90 20.00 3/183
Frank A. Falco. 12/11/98 225,000 5.625 37.19 6.75 4/069
12/11/98 10,000 5.625 28.1875 6.75 3/224
12/11/98 7,500 5.625 20.00 6.75 1/325
05/22/97 7,500 15.625 40.90 20.00 3/183
Michael B. Killeen 12/11/98 1,000 5.625 37.19 6.75 8/028
12/11/98 1,500 5.625 35.00 6.75 8/143
12/11/98 500 5.625 25.625 6.75 7/204
12/11/98 1,000 5.625 20.00 6.75 6/151
12/11/98 1,000 5.625 20.00 6.75 7/028
12/11/98 2,003 5.625 20.00 6.75 5/122
05/22/97 2,503 15.625 40.00 20.00 6/325
05/22/97 1,000 15.625 29.375 20.00 8/231
05/22/97 1,000 15.625 82.50 20.00 8/364
John M. Tuohy 12/11/98 750 5.625 35.00 6.75 8/143
12/11/98 250 5.625 25.625 6.75 7/204
12/11/98 500 5.625 20.00 6.75 7/028
12/11/98 2505 5.625 20.00 6.75 5/122
05/22/97 2505 15.625 40.00 20.00 6/325
05/22/97 500 15.625 29.375 20.00 8/231
</TABLE>
____________
(1) Reflects, retroactively, the effects of a 1-for-10 reverse stock split
effective April 16, 1999.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
FNHI. FNHI has no employment contracts with any employees at this time.
Fusion Networks. In October 1999, Hernando Bahamon entered into a Services
Agreement with Fusion Networks pursuant to which Mr. Bahamon agreed to provide
services to Fusion Networks in connection with the launch of its Bogota,
Colombia website. The Services Agreement provides for monthly compensation of
$15,000 and runs for a term of six months from July 1, 1999 subject to automatic
renewal monthly thereafter subject to the right of either Mr. Bahamon or Fusion
Networks to terminate the agreement. It is anticipated that Mr. Bahamon will
enter into a long-term employment agreement with FNHI following the merger.
114
<PAGE>
IDM. Effective January 1, 1996, Joel A. Freedman and Frank A. Falco each
entered into employment agreements, superseding their prior employment
agreements, with IDM on substantially identical terms. Subsequently, on
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
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 IDM's 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 $37.19 per share and expiring
February 17, 2003 (reflects the effects of a 1- for-10 reverse stock split
effective April 16, 1999).
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 of Messrs. Freedman and Falco.
The employment agreements prohibit Mr. Freedman and Mr. Falco from
competing, directly or indirectly, with IDM or disclosing confidential matters
with respect to IDM for two years after termination of employment. Each of such
agreements expires on December 31, 2005 and are thereafter automatically
extended for one-year periods unless there is a notice of termination from
either IDM or the employee.
In the event of their disability, Messrs. Freedman and Falco are entitled
to continue to receive their full salary at the date of disability for a period
of one year after which time IDM 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 or Mr. Falco, as appropriate, shall be
entitled to three months salary. In the event of the termination of Mr. Freedman
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 IDM for
any reason other than death or disability, IDM 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 IDM 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 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.
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 IDM's common stock; (ii)
a change in the 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."
IDM has no other employment agreements with any other officers or
employees. IDM has, however, entered into agreements with certain of its
employees pursuant to which such employees have agreed to maintain the
confidentiality of certain information and have agreed to not compete with IDM
within 250 miles of IDM's principal places of business for a period of three
years following the termination of such persons' employment with IDM.
Additionally, IDM has entered into agreements with certain 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 IDM 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 Falco to be elected when standing for election as a
director shall not constitute a "change in control" for purposes thereof.
115
<PAGE>
In addition to the foregoing employment and change of control arrangements,
IDM's 1993 Plan, 1995 Plan and 1998 Plan provide that all outstanding options
shall become fully vested and exercisable in the event of a change in control.
Retirement Savings Plan
In July of 1992, IDM amended an existing profit sharing plan to convert
such plan to a retirement savings plan under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan generally covers all employees of IDM who have
completed two years of service with IDM. 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. IDM may, at its own
discretion, contribute to the plan. IDM made no contribution to the 401(k) Plan
during the fiscal year ended December 31, 1998.
Certain Relationships and Transactions
IDM. Since July of 1988, IDM has leased its executive offices and yard
storage facilities from L&G Associates, a partnership controlled by Joel
Freedman and Frank Falco, IDM's founders and senior officers and directors. On
March 1, 1993, IDM entered into a new five year lease on such property,
including two additional parcels with storage buildings previously leased to a
third party. Pursuant to such lease, IDM pays base rent of $270,000 annually
subject to annual adjustments based on the Consumer Price Index, plus all costs
of maintenance, insurance and taxes.
In 1994, IDM and L&G entered into an agreement regarding the construction
and/or renovation of expanded facilities on the premises leased by IDM 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 of IDM formed a 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 IDM's needs and was on terms which
were fair to IDM. Based on such agreement and determination, IDM 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
IDM at an approximate cost of $303,000 constitutes payment in full of rent for
the initial term of the lease of such office space. IDM, however, is responsible
for all taxes, utilities, insurance and other costs of occupying the office
space during the initial term. Construction of such warehouse space by IDM at an
estimated cost of $145,000 constitutes payment in full of rent for the initial
term of the lease of such warehouse space. IDM, however, is 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 fifteen years to May 31, 2011. The amortization associated with 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,
1999 and 1998 was $93,320 and $93,320, respectively. For the years ended
December 31, 1999 and 1998, the rent paid totaled $315,130 and $308,948,
respectively.
IDM believes that its existing lease with L&G Associates, as modified, is
on terms no less favorable to IDM than could have been obtained from
unaffiliated third parties.
Prior to the September 1997 amendment, the employment agreements of Messrs.
Freedman and Falco provided that Messrs. Freedman and Falco would receive a draw
of salary and bonus based on projected earnings. Because actual earnings were
below projected earnings, Messrs. Freedman and Falco were indebted to IDM for
excess draws at December 31, 1996 and at prior years end. In addition to amounts
owed to IDM relating to excess draws, IDM has periodically paid certain personal
expenses of Messrs. Freedman and Falco. At December 31, 1998, IDM's receivables
from Mr. Freedman and Mr. Falco had been repaid in full. At December 31, 1997,
IDM's receivable from Mr. Freedman totaled $7,965 and IDM's receivable from Mr.
Falco totaled $361,576. All amounts owed to IDM by Messrs. Freedman and Falco
were repayable on demand with interest accruing at 7%.
During 1998, IDM 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.
116
<PAGE>
Fusion Networks. Since July 1999, Fusion Networks has leased its executive
offices in Miami from Latam Holdings, a company controlled by Enrique Bahamon.
Fusion Networks rents that space pursuant to a lease expiring June 30, 2000 and
pays monthly rent of $2,500.
Since July 1999, Fusion Networks has been a party to a Copyright
Development and Transfer Agreement with Red Colombia Ltda. pursuant to which
Fusion Networks has agreed to pay to Red Colombia $182,559 for services in
connection with the launch of Fusion Networks' website in Bogota, Colombia.
Hernando Bahamon, President, Chief Executive Officer, a Director and a principal
shareholder of Fusion Networks, and Felipe Santos, a Director and a principal
shareholder of Fusion Networks, are each Directors and principal owners of Red
Colombia. Prior to forming Fusion Networks, Hernando Bahamon was Chief Operating
Officer of Red Colombia.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of the common stock of IDM and Fusion Networks as of
February 9, 2000 and as adjusted to give pro forma effect to the merger, by (a)
each stockholder known to own beneficially more than 5% of either the IDM common
stock or Fusion Networks common stock outstanding on such date, (b) each
director of IDM and Fusion Networks prior to the merger, (c) each nominee for
director of FNHI following the merger, (d) each proposed executive officer of
FNHI following the merger, and (e) all directors and executive officers of IDM
and Fusion Networks (both prior to and following the merger) as a group:
<TABLE>
Shares of
Shares of IDM Shares of Fusion Networks FNHI
Present and Proposed Common Stock Common Stock Common Stock
Directors, Officers Before Merger (2) Before Merger (2) After Merger (2)
and 5% Stockholders (1) Number Percent Number Percent
- ----------------------- -------- --------- -------- --------- -----------------------
Number Percent
------ -------
<S> <C> <C> <C> <C> <C> <C>
Hernando Bahamon (3)(4).. -- -- 5,714,333 17.2 5,714,333 15.5
Felipe Santos (5)(6)....... -- -- 2,000,000 6.0 2,000,000 5.4
Enrique Bahamon (3)(7)..... -- -- 500,000 1.5 500,000 1.4
Traci Hammes............... -- -- 25,000 * 25,000 *
Jeremy Barbera............. -- -- -- -- -- --
Marketing Services
Group, Inc. (8)(9)........ -- -- 7,000,000 19.1 7,000,000 17.3
Infonet Group, Inc.(10).... -- -- 3,900,000 11.8 3,900,000 10.6
Alexander/Rachel LLC
(11)(12)(13)............. 125,000 3.3 3,900,000 11.8 4,025,000 10.9
NBDB LLC (11)(14)(15)...... 125,000 3.3 3,900,000 11.8 4,025,000 10.9
ML Partners (16)(17)....... -- -- 4,000,000 11.4 4,000,000 10.3
Frank A. Falco (18)........ 289,605 7.2 -- -- 289,605 *
Joel A. Freedman (19)...... 242,500 6.0 -- -- 242,500 *
Michael B. Killeen (20).... 17,504 * -- -- 17,504 *
Robert McGuinness (21)..... 2,750 * -- -- 2,750 *
Frank Patti (22)........... 2,750 * -- -- 2,750 *
Richard Keller (23)........ 1,500 * -- -- 1,500 *
Mark Franceschini (24)..... 1,000 * -- -- 1,000 *
All executive officers
group (25)(26) 579,558 13.5 8,239,333 24.9 8,793,967 23.5
</TABLE>
_______________
* Less than 1%.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in the footnotes to the table.
(2) Includes shares of common stock not outstanding, but which are subject to
options exercisable within 60 days of the date of the information set forth
in this table, which are deemed to be outstanding for the purpose of
computing the shares held and percentage of outstanding common stock with
respect to the holder of such options. Such shares are not, however, deemed
to be outstanding for the purpose of computing the percentage of any other
person.
(3) Address is 8115 N.W. 29th Street, Miami, Florida 33122.
(4) Includes 4,714,333 shares held by George & Jeb Corp., a Panamanian
corporation controlled by Mr. Bahamon and his wife.
(5) Address is Calle 76 #3-70, Apt. 500, Bogota, Colombia.
(6) Includes 2,000,000 shares held by Media Show, Inc., a Panamanian
corporation controlled by Mr. Santos.
117
(7) Includes 500,000 shares held by Bahamon Sanders Inc., a Florida corporation
controlled by Mr. Bahamon and his family.
(8) Address is 333 Seventh Avenue, 20th Floor, New York, New York 10001.
(9) Includes 3,500,000 shares of common stock with respect to which Marketing
Services Group, Inc. holds an option to acquire for 1,500,000 shares of
MSGI common stock expiring June 2000.
(10) Address is 734 Franklin Avenue, Suite 203, Garden City, New York 11530.
(11) Includes 125,000 shares of IDM common stock held before the merger, and
125,000 shares of FNHI common stock to be held after the merger, jointly by
Alexander/Rachel LLC and NBDB LLC.
(12) Includes 3,900,000 shares of Fusion Networks common stock held by
Alexander/Rachel LLC before the merger, and 3,900,000 shares of FNHI common
stock to be held after the merger. Laura Huberfeld is the general partner
of Alexander/Rachel LLC and may be deemed to the beneficial owner of the
shares held by Alexander/Rachel LLC.
(13) Address is 250 Longwood Crossing, Lawrence, New York 11559.
(14) Includes 3,900,000 shares of Fusion Networks common stock held by NBDB LLC
before the merger, and 3,900,000 shares of FNHI common stock to be held
after the merger. Naomi Bodner is the general partner of NBDB LLC and may
be deemed to be the beneficial owner of the shares held by NBDB LLC.
(15) Address is 16 Grosser Lane, Mosey, New York 10952.
(16) Address is 115 East Putnam Ave., Greenwich, Connecticut 06830
(17) Includes 2,000,000 shares of common stock underlying warrants held by ML
Partners.
(18) Includes 242,500 shares issuable upon exercise of incentive stock options
and non-qualified stock options held by Mr. Falco. Excludes shares held by
Margaret Mullin, the adult daughter of Frank Falco, and the children of
Mrs. Mullin. Mr. Falco disclaims any beneficial ownership interest in such
shares.
(19) Includes 242,500 shares issuable upon exercise of incentive stock options
and non-qualified stock options held by Mr. Freedman. Excludes shares held
by the adult children of Joel Freedman. Mr. Freedman disclaims any
beneficial ownership interest in such shares.
(20) Includes 16,754 shares issuable upon exercise of stock options.
(21) Includes 2,750 shares issuable upon exercise of non-qualified stock
options.
(22) Includes 2,750 shares issuable upon exercise of non-qualified stock
options.
(23) Includes 1,500 shares issuable upon exercise of non-qualified stock
options.
(24) Includes 1,000 shares issuable upon exercise of non-qualified stock
options.
(25) Includes 12 persons for IDM, 7 persons for Fusion Networks and 6 persons
for FNHI.
(26) Includes 532,453 shares of Common Stock subject to stock options held by
the officers and directors of IDM and exercisable within 60 days, 0 shares
of Common Stock subject to stock options held by the officers and directors
of Fusion Networks, and 485,000 shares of Common Stock subject to stock
options held by the proposed officers and directors of FNHI.
118
<PAGE>
DESCRIPTION OF FNHI CAPITAL STOCK
THE FOLLOWING IS A SUMMARY DESCRIPTION OF THE MATERIAL ASPECTS OF THE
CAPITAL STOCK OF FNHI AND IS QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF
FNHI'S RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS WHICH ARE INCORPORATED
HEREIN BY REFERENCE AND ARE ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
APPENDICES H AND I, RESPECTIVELY.
General
The authorized capital stock of FNHI upon completion of the merger will
consist of 100,000,000 shares of common stock, $0.00001 par value, and 1,000,000
shares of preferred stock, $0.00001 par value. Based upon the number of shares
of IDM common stock and Fusion Networks common stock outstanding as of December
31, 1999, it is anticipated that approximately 36,922,273 shares of FNHI common
stock will be issued and outstanding immediately after the completion of the
merger.
Common Stock
Each share of FNHI common stock entitles the holder to one vote on matters
submitted to a vote of the stockholders. The holders of FNHI common stock will
not be entitled to cumulate votes for the election of directors.
The holders of FNHI common stock are entitled to receive ratably a share of
dividends declared by the FNHI board of directors. In the event of liquidation,
dissolution or winding up of FNHI, holders of FNHI common stock have the right
to a ratable portion of the assets remaining after the payment of liabilities
and liquidation preferences of any outstanding shares of FNHI preferred stock.
The holders of FNHI common stock have no preemptive rights or rights to convert
their FNHI common stock into other securities. All outstanding shares of FNHI
common stock immediately following completion of the merger will be fully paid
and nonassessable. The rights of the holders of FNHI common stock will be
subject to, and may be adversely affected by, the rights of the holders of FNHI
preferred stock, if any.
Preferred Stock
FNHI's Restated Certificate of Incorporation provides that FNHI preferred
stock may be issued from time to time in one or more series. FNHI's board of
directors has the authority to fix and determine the number of shares
constituting each such series and the relative rights, preferences, privileges
and immunities, if any, and any qualifications, limitations or restrictions
thereof, of the shares thereof, including the authority to fix and determine the
dividend rights, dividend rates, conversion rights, voting rights and terms of
redemption (including sinking fund provisions), redemption prices and
liquidation preferences of any wholly unissued series of FNHI preferred stock
and to increase or decrease the number of shares of any outstanding series,
without further vote or action by FNHI's stockholders. No FNHI preferred stock
is currently outstanding or will be issued in connection with the merger, and
FNHI has no present plans to issue any shares of FNHI preferred stock.
Prohibited Business Transactions
As a corporation organized under the laws of the State of Delaware, FNHI is
subject to Section 203 of the DGCL, which restricts certain business
combinations between FNHI and an "interested stockholder" (in general, a
stockholder owning 15% or more of the outstanding voting stock of FNHI) or such
stockholder's affiliates or associates for a period of three years following the
date on which the stockholder becomes an "interested stockholder." The
restrictions do not apply if: (i) prior to an interested stockholder becoming
such, the FNHI board approves either the business combination or the transaction
by which such person became an interested stockholder; (ii) upon consummation of
the transaction, the interested stockholder owns at least 85% of the voting
stock of FNHI outstanding at the time the transaction commenced (excluding
shares owned by certain employee stock plans and persons who are both directors
and officers of FNHI); or (iii) at or subsequent to the time an interested
stockholder becomes such, the business combination is both approved by the FNHI
board of directors and authorized at an annual or special meeting of FNHI's
stockholder by the affirmative vote of at least two-thirds of the outstanding
voting stock of FNHI not owned by the interested stockholder.
119
<PAGE>
Warrants and Options
Pursuant to the terms of the merger agreement, FNHI will assume all
warrants and options of IDM and Fusion Networks outstanding at the Effective
Time. All outstanding warrants and options of IDM will be exercisable to
purchase common stock of FNHI on identical terms following the merger. All
outstanding warrants and options of Fusion Networks will be exercisable to
purchase common stock of FNHI on identical terms following the merger.
IDM. In conjunction with IDM's initial public offering in April 1994, IDM
issued Class A Warrants. As of June 30, 1999, a total of 34,259 Class A Warrants
of IDM remained outstanding and exercisable. Each Class A Warrant is exercisable
until April 20, 2000 to purchase two shares of common stock of IDM at $90.00 per
warrant, or $45.00 per share.
In 1998, IDM issued "Lock-Up Warrants" in connection with lock-up
agreements entered into with certain stockholders. As of June 30, 1999, a total
of 67,000 Lock-Up Warrants remained outstanding and exercisable. Each Lock-Up
Warrant is exercisable until February 2001 to purchase one share of common
stock of IDM at $10.00 per share.
In 1997, IDM issued warrants in conjunction with the offering of
convertible notes. As of June 30, 1999, a total of 134,849 warrants issued in
conjunction with convertible notes remained outstanding and exercisable. Each of
those warrants is exercisable until August 2000 to purchase one share of common
stock of IDM at $10.00 per share.
In 1998, IDM issued warrants in conjunction with the offering of Series C
Preferred Stock. As of June 30, 1999, a total of 137,475 warrants issued in
conjunction with Series C Preferred Stock remained outstanding and exercisable.
Each of those warrants is exercisable until February 2002 to purchase one share
of common stock of IDM at $2.71875 per share.
At December 31, 1999, IDM had a total of 1,030,272 options outstanding.
Fusion Networks. In connection with a private placement conducted by Fusion
Networks in November 1999, Fusion Networks issued 3,239,333 warrants, all of
which remain outstanding and exercisable. Each of those warrants is exercisable
until November 2002 to purchase one share of common stock of Fusion Networks at
$6.00 per share. Following the merger, each of those warrants will be
exercisable to purchase one share of FNHI common stock at $6.00 per share.
In November 1999, Fusion Networks issued 2,500,000 warrants to various
consultants, all of which remain outstanding and exercisable. Each of those
warrants is exercisable until November 2002 to purchase one share of common
stock of Fusion Networks at $5.00 per share. Following the merger, each of those
warrants will be exercisable to purchase one share of FNHI common stock at $5.00
per share.
In December 1999, in connection with the issuance of shares of common stock
to Marketing Services Group, Inc., Fusion Networks granted to MSGI a six month
right, terminating in June 2000, to acquire up to an additional 3,500,000 shares
of common stock for an additional 1,500,000 shares of common stock of MSGI.
In December 1999, Fusion Networks issued 500,000 three year warrants
exercisable at $5.00 per share to one consultant.
Fusion Networks has reserved a total of 5,320,000 shares for issuance
pursuant to its Stock Option Plan. As of December 31, 2000, a total of 825,000
options were outstanding.
Registrar and Transfer Agent
The registrar and transfer agent of FNHI will be Continental Stock Transfer
& Trust Company.
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COMPARISON OF RIGHTS OF HOLDERS OF IDM COMMON STOCK AND FUSION
NETWORKS COMMON STOCK AND FNHI COMMON STOCK
The following is a summary of the material differences between the rights
of holders of IDM common stock and Fusion Networks common stock before the
merger and the rights of holders of FNHI common stock after the merger. Because
Fusion Networks and FNHI are both organized under the laws of the State of
Delaware, the differences arise solely from differences between various
provisions of their respective Certificates of Incorporation and Bylaws.
However, because IDM is organized under the laws of the State of New Jersey and
FNHI is organized under the laws of the State of Delaware, the differences arise
both from differences between various provisions of their respective
Certificates of Incorporation and Bylaws and New Jersey and Delaware law.
The discussion of the comparative rights of the stockholders of IDM, Fusion
Networks and FNHI set forth below does not purport to be complete and is subject
to and qualified in its entirety by reference to the Certificates of
Incorporation and Bylaws of IDM, Fusion Networks and FNHI.
Authorized Capital
The total number of shares FNHI will have the authority to issue will be
101,000,000, consisting of 100,000,000 shares of common stock, par value
$0.00001 per share, and 1,000,000 shares of preferred stock. The total number of
shares of capital stock which IDM has authority to issue is 8,500,000,
consisting of 7,500,000 shares of common stock, par value $0.01 per share and
1,000,000 shares of preferred stock, par value $1.00 per share. The total number
of shares of capital stock which Fusion Networks has the authority to issue is
60,000,000, consisting of common stock, $.00001 par value.
Number and Term of Directors
The DGCL provides that the board of directors of a Delaware corporation
will consist of one or more directors as fixed by the certificate of
incorporation or bylaws. FNHI's Bylaws provide for a Board of Directors of not
less than five directors and not more than eleven directors, as fixed by the
Board of Directors from time to time. Pursuant to the terms of the merger
agreement, the Board of Directors of FNHI will consist of seven persons with
three of the directors to be designated by Fusion Networks and two of the
directors to be designated by IDM. Each director of FNHI will serve for a term
of one year or until their successors are duly elected and qualified.
Fusion Networks' Bylaws provide for a Board of Directors consisting of not
less than one director and not more than five directors, as fixed by the Board
of Directors from time to time, each serving for a term of one year or until
their successors are duly elected and qualified.
The NJBCA provides that the Board of Directors of a New Jersey corporation
will consist of one or more directors as fixed by the articles of incorporation
or bylaws. IDM's Bylaws provide that the board will consist of not less than
five and not more than nine directors, which number may be increased or
decreased within those limits from time to time by resolution of a majority of
the IDM Board of Directors or by resolution of the stockholders at their regular
meetings or at a special meeting called for such purpose. IDM's board of
directors is divided into three classes with one class being elected annually
for a three-year term and until their successors are elected and qualified.
Committees of the Board
FNHI's bylaws provide that its Board of Directors may establish one or more
committees having the authority of the Board of Directors in the management of
the business of FNHI to the extent provided in the resolution adopted by the
Board of Directors. FNHI's Board of Directors has established a Compensation
Committee and an Audit Committee. FNHI's Compensation Committee will have
responsibility for (i) reviewing the compensation and employee benefit policies
of FNHI, (ii) recommending base salary amounts and incentive awards for all
elected officers of FNHI and setting guidelines for the administration of all
salaries, (iii) administering incentive compensation and awarding stock options
to employees under any stock option or compensation plan of FNHI and amending or
modifying any provisions of such stock option or compensation plan that may be
amended or modified without stockholder approval and (iv) supervising all
administrative matters with respect to the foregoing. The Compensation Committee
will be comprised of not less than two directors, each of whom will meet the
requirements of independence as established by the exchange or market on which
FNHI's stock
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is then traded or quoted. FNHI's Audit Committee will have responsibility for
(i) reviewing the company's financial statements with the independent auditors,
(ii) determining the effectiveness of the audit effort through regular periodic
meetings with the independent auditors, (iii) determining through discussion
with the independent auditors that no unreasonable restrictions were placed on
the scope or implementation of their examinations, (iv) inquiring into the
effectiveness of the company's financial and accounting functions and internal
controls through discussions with the independent auditors and officers of the
company, (v) recommending to the full Board of Directors the engagement or
discharge of the company's independent auditors, and (vi) reviewing with the
independent auditors the plans and results of the auditing engagement.
IDM's Bylaws provide that its Board of Directors may establish a committee
or committees having the authority of the Board of Directors in the management
of the business of IDM to the extent provided in the resolution adopted by its
Board of Directors, except that no such committee shall (i) make, alter or
repeal any bylaw of the corporation, (ii) elect or appoint any director, or
remove any officer or director, (iii) submit to shareholders any action that
requires shareholders' approval, or (iv) amend or repeal any resolution
theretofore adopted by the board which by its terms is amendable or repealable
only by the board. IDM's Board of Directors has established a Compensation
Committee and an Audit Committee.
Fusion Networks' Bylaws provide that its Board of Directors may establish
one or more committees having the authority of the Board of Directors in the
management of the business of Fusion Networks to the extent provided in a
resolution adopted by a majority of the Board of Directors. Currently, Fusion
Networks' Board of Directors has no committees.
Removal of Directors
The DGCL provides that a director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, except (i) in the case of a
corporation whose board is classified, that directors may be removed only for
cause unless the certificate of incorporation provides otherwise, or (ii) if the
corporation has cumulative voting, in which event if less than the entire board
is to be removed, no director may be removed without cause if the votes cast
against the director's removal would be sufficient to elect that director if
voted cumulatively either at an election of the entire board of directors or for
classes of the board. FNHI's Restated Certificate of Incorporation does not
provide for directors to be removed without cause or provide for cumulative
voting. Fusion Networks' Certificate of Incorporation does not classify its
board of directors and does not provide for cumulative voting. Fusion Networks'
Bylaws require the affirmative vote of the holders of a majority of the shares
entitled to vote to remove a director without cause.
The NJBCA provides that one or more or all the directors of a corporation
may be removed for cause or, unless otherwise provided in the certificate of
incorporation, without cause by the shareholders by the affirmative vote of the
majority of the votes cast by the holders of shares entitled to vote for the
election of directors, or such greater vote as may be required by the
certificate of incorporation to elect such director(s). Unless otherwise
provided in the certificate of incorporation, the removal of directors under the
NJBCA is subject to the following qualifications: (i) in any case where
cumulative voting is authorized, if less than the total number of directors then
serving on the board is to be removed by the shareholders, no one of the
directors may be removed if the votes cast against his removal would be
sufficient to elect him if then voted cumulatively at an election of the entire
board; or, if there are classes of directors, at an election of the class of
directors of which he is a part, (ii) a director elected by a class vote may be
removed only by a class vote of the shareholders entitled to vote for such
director's election, (iii) if the certificate of incorporation requires a
greater vote than a plurality of the votes cast for the election of directors,
no director may be removed except by the greater vote required to elect such
director, and (iv) shareholders of a corporation whose board of directors is
classified shall not be entitled to remove directors without cause. IDM's
Certificate of Incorporation and Bylaws do not modify the NJBCA with respect to
the removal of directors or provide for cumulative voting.
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Amendment to Bylaws
Under the DGCL, bylaws may be altered, amended, supplemented or repealed,
or new bylaws adopted, by the stockholders entitled to vote, by the board of
directors, or by any other manner as may be authorized by the certificate of
incorporation. FNHI's Restated Certificate of Incorporation provides that
stockholders can amend FNHI's Bylaws with an affirmative vote of more than 50%
of the votes entitled to be cast. FNHI's Bylaws provide that the Board of
Directors may amend FNHI's Bylaws with an affirmative vote of a majority of the
then authorized number of FNHI's Board of Directors. Fusion Networks' Bylaws may
be altered, amended or repealed, or new bylaws may be adopted by a majority of
the Board of Directors, but any bylaws adopted by the Board of Directors may be
amended or repealed by Fusion Networks' stockholders.
The NJBCA and IDM's Bylaws provide that the power to adopt, amend or repeal
the bylaws will be vested in the board of directors, subject to the right of the
shareholders under the NJBCA to alter, repeal or make new bylaws. Any bylaw made
by a corporation's shareholders may not be altered or repealed by the board.
Amendment to Certificates of Incorporation
Under the DGCL, amendment of the certificate of incorporation will be made
by a resolution of the board of directors setting forth the amendment, declaring
its advisability, and either calling a special meeting of the stockholders
entitled to vote or directing that the amendment proposed be considered at the
next annual meeting of the stockholders. At such stockholder's meeting, a
majority of the outstanding shares entitled to vote is required to approve the
amendment. If an amendment would increase or decrease the number of authorized
shares of such class, increase or decrease the par value of the shares of such
class or alter or change the powers, preferences or other special rights of a
class of outstanding shares so as to affect the class adversely, then a majority
of shares of that class must approve the amendment as well. The DGCL also
permits a corporation to make provision in its certificate requiring a greater
proportion of voting power to approve a specified amendment. FNHI's Restated
Certificate of Incorporation and Bylaws do not provide any special provisions
regarding amendments to its Certificate of Incorporation. Fusion Networks'
Certificate of Incorporation and Bylaws do not provide any special provisions
regarding amendments to its Certificate of Incorporation.
Under the NJBCA, any amendment to a corporation's certificate of
incorporation must be approved by the board of directors and by the affirmative
vote of a majority of the shareholders entitled to vote thereon, except that (i)
the Certificate of Incorporation may provide for a specified proportion or
number larger than a majority, and (ii) except as otherwise limited by the
certificate of incorporation, the board of directors may effect amendments,
without shareholder approval, changing the registered office or agent, in
certain cases changing authorized stock, effecting a share dividend, division or
combination and effecting a share cancellation. IDM's Certificate of
Incorporation does not modify the NJBCA with regard to amendment of the
certificate of incorporation.
Action by Written Consent of Holders of Common Stock
The DGCL and NJBCA both contain provisions permitting actions by holders of
common stock without providing notice and convening a meeting of such holders.
Fusion Networks' Bylaws permit any actions to be taken by stockholders without a
meeting, by written consent, provided such written consent sets forth the
actions taken and is signed by the holders of the minimum number of shares
required to take such actions at a meeting at which all shares entitled to vote
are present and voted. IDM's Bylaws prohibit shareholders from taking actions by
written consent without a meeting and notice of such meeting. FNHI's Certificate
of Incorporation prohibits any actions by stockholders without a meeting, by
written consent.
Indemnification
The DGCL and NJBCA both contain provisions setting forth conditions under
which a corporation may indemnify its directors, officers and employees. While
indemnification is permitted only if certain statutory standards of conduct are
met, the DGCL and the NJBCA are substantially similar in providing for
indemnification if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful.
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Both the NJBCA and the DGCL provide that indemnification of officers,
directors and employees is merely permissive. The one exception to the DGCL's
and the NJBCA's permissive indemnification rule is that a corporation must
indemnify a person who is successful on the merits or otherwise in the defense
of certain specified actions, suits or proceedings for expenses and attorneys'
fees actually and reasonably incurred in connection therewith. Although
indemnification is permissive in Delaware and New Jersey, both the DGCL and
NJBCA allow a corporation, through its certificate of incorporation, bylaws, or
other intracorporate agreements, to make indemnification mandatory. Pursuant to
this authority, FNHI's Bylaws provide that FNHI will indemnify its directors and
officers to the fullest extent permitted by law. Fusion Networks' Bylaws provide
that Fusion Networks shall indemnify to the fullest extent of the DGCL all
persons whom it may indemnify pursuant thereto and IDM's Bylaws provide that IDM
shall indemnify to the fullest extent of the NJBCA all persons whom it may
indemnify pursuant thereto.
Both the NJBCA and the DGCL also differentiate between third-party actions
and claims by or in the right of the corporation (i.e., stockholder derivative
suits). Unlike a third-party action, in which indemnification is permissive
under both statutes and mandatory under the Bylaws of FNHI, Fusion Networks and
IDM, the NJBCA and DGCL do not permit indemnification in a stockholder
derivative suit if the person is found liable to the corporation unless and only
to the extent that the Superior Court of New Jersey or the Delaware Court of
Chancery, as appropriate, or the court in which such action or suit was brought
determines that the person is fairly and reasonably entitled to indemnification.
Further, the corporation may indemnify such persons only for attorneys' fees and
other expenses.
The advancement of expenses is permissive under the NJBCA and the DGCL. The
Bylaws of FNHI, Fusion Networks and IDM each provides for the advancement of
expenses incurred by a director or officer, subject to an undertaking that the
director or officer will repay such amount if it is ultimately determined that
such director or officer is not entitled to indemnification.
Liability of Directors
Under the DGCL, a corporation's certificate of incorporation may contain a
provision limiting or eliminating a director's personal liability to the
corporation or its stockholders for monetary damages for a director's breach of
fiduciary duty subject to certain limitations. FNHI's Restated Certificate of
Incorporation and Fusion Networks' Certificate of Incorporation and Bylaws each
include such a provision. Accordingly, under the DGCL, Fusion Networks'
Certificate of Incorporation and Bylaws and FNHI's Restated Certificate of
Incorporation, indemnification is provided if the person seeking indemnification
acted in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in cases of liability
involving criminal violations, only if the person had no reasonable cause to
believe that his conduct was unlawful), provided, however, that if the person
seeking indemnification is adjudged liable to the corporation by a court,
indemnification is provided only if the court, upon application, determines that
such indemnification is fair and reasonable in view of all the circumstances of
the case.
IDM's Certificate of Incorporation provides that a director or officer will
not be personally liable to IDM or its shareholders for damages relating to
breach of any duty owed to the corporation or its shareholders, unless the
liability relates to a breach of the duty of loyalty to the corporation or its
shareholders, acts or omissions involving a lack of good faith or an intentional
or knowing violation of law, or resulting in receipt by such officer or director
of an improper personal benefit.
Stockholder Meetings
In accordance with FNHI's Bylaws, annual meetings of stockholders will be
held on such date as may be fixed by FNHI's Board of Directors, and special
meetings of stockholders may be called only by a majority of FNHI's Board of
Directors, by the Chairman of the Board and Chief Executive Officer or by the
President. Pursuant to Fusion Networks' Bylaws, annual meetings of stockholders
will be held on such date as may be fixed by Fusion Networks' Board of
Directors, and special meetings of stockholders may be called by the Board of
Directors, the Chairman of the Board or the President. The DGCL, FNHI's Bylaws
and Fusion Networks' Bylaws require that whenever stockholders are required or
permitted to take action at a meeting, a written notice stating the place, time
and date of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, must be sent to all stockholders of
record entitled to vote thereon not less than 10 nor more than 60 days before
the meeting. Under the DGCL, notice of a meeting to consider an agreement of
merger must be sent at least 20 days prior to the date of the meeting.
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The NJBCA and IDM's Bylaws provide that regular meetings of its
shareholders shall be held annually and may be held on call by the Board of
Directors from time to time as and when the Board determines. The NJBCA further
provides that if a regular annual meeting of the shareholders has not been held
for a period of 13 months, the Superior Court may, upon application of any
shareholder, order that a regular meeting of the shareholders be held. The NJBCA
and IDM's Bylaws provide that the President, a majority of the directors, or a
shareholder or shareholders holding 10% or more of shares entitled to vote at
such meeting may call a special meeting. Notice of any meetings of shareholders
setting out the place, time and date of the meeting and the purpose or purposes
for which the meeting is called must be sent to all shareholders of record
entitled to vote thereon not less than 10 nor more than 60 days before the
meeting.
Mergers and Consolidations
In order to effect a merger under the DGCL, a corporation's board of
directors must adopt an agreement of merger and recommend it to the
stockholders. The agreement must be adopted by holders of a majority of the
outstanding shares of the corporation entitled to vote thereon. The NJBCA
provides that a resolution containing a plan of merger or exchange must be
approved by the affirmative vote of a majority of the directors present at a
meeting and submitted to the stockholders and approved by the affirmative vote
of the holders of a majority of the voting power of all shares entitled to vote.
Unlike the DGCL, the NJBCA requires that any class of shares of a New Jersey
corporation must approve the plan if it contains a provision which, if contained
in a proposed amendment to the corporation's articles of incorporation, would
entitle such class to vote as a class.
Business Combinations
The DGCL bars a corporation which has securities traded on an exchange,
designated on the Nasdaq National Market or held of record by more than 2,000
stockholders from engaging in certain business combinations, including a merger,
sale of substantial assets, loan or substantial issuance of stock, with an
interested stockholder, or an interest stockholder's affiliates and associates,
for a three-year period beginning on the date the interested stockholder
acquires 15% or more of the outstanding voting stock of the corporation. The
restrictions on business combinations do not apply if (a) the board of directors
gives prior approval to the transaction in which the 15% ownership level is
exceeded, (b) the interested stockholder acquires at one time at least 85% of
the corporation's stock (excluding those shares owned by persons who are
directors and also officers as well as employee stock plans in which employees
do not have a confidential right to vote), or (c) the business combination is
approved by the board of directors and authorized at a meeting of stockholders
by the holders of at least two-thirds of the outstanding voting stock, excluding
shares owned by the interested stockholder. Although a Delaware corporation may
elect, pursuant to its certificate or bylaws, not to be governed by this
provision, FNHI's Restated Certificate of Incorporation and Bylaws and Fusion
Networks' Certificate of Incorporation and Bylaws do not contain such an
election or other limitation on the applicability of this provision.
The NJBCA contains a provision which restricts certain business combination
transactions with an interested stockholder for five years after such
shareholder has acquired 10% of the voting power of a corporation organized in
New Jersey and having its principal offices or significant business operations
in New Jersey, unless such business combination or the acquisition of shares by
the interested shareholder is approved prior to such share acquisition by the
corporation's board of directors.
Other Anti-Takeover Provisions
In addition to the anti-takeover measures discussed above, (1) the
provisions in IDM's Bylaws limiting the right of shareholders to call a special
meeting of shareholders, (2) the authority of the Board of Directors to issue,
without shareholder approval, shares of preferred stock with voting and
conversion rights that could adversely affect the voting power of the holders of
IDM's Common Stock, and (3) the adoption by IDM of a Share Rights Plan, or
"poison pill", may make it more difficult to effect a change in control in IDM
and may discourage or deter a third party from attempting a takeover.
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Dissenter' Rights
Under both the DGCL and the NJBCA, stockholders may exercise a right of
dissent from certain corporate actions and obtain payment of the fair value of
their shares. This remedy is an exclusive remedy, except where the corporate
action involves fraud or illegality. Under the DGCL, dissenters' rights are
limited. Appraisal rights are available only in connection with certain
statutory mergers or consolidations, amendments to the certificate of
incorporation (if so provided in the certificate of incorporation), any merger
or consolidation in which the corporation is a constituent corporation, or sales
of all or substantially all of the assets of a corporation. Under the NJBCA, the
categories of transactions subject to dissenters' rights are broader than those
in the DGCL. A shareholder of a New Jersey corporation may exercise dissenters'
rights in connection with a disposition of all or substantially all of the
corporation's property and assets not in the usual course of business and a plan
of merger or consolidation to which the corporation is a party.
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PROPOSED AMENDMENT TO IDM'S 1998 COMPREHENSIVE
STOCK OPTION AND AWARD PLAN
IDM's stockholders are being asked to approve an amendment to the IDM
Environmental Corp. 1998 Comprehensive Stock Option and Award Plan (the "1998
Stock Option Plan") which will (1) increase the number of shares of common stock
reserved for issuance under such plan by 1,600,000 shares, and (2) fix a maximum
number of shares which may be subject to awards granted under the 1998 Stock
Option Plan to any individual in any calendar year of 400,000. The Board of
Directors of IDM adopted the amendment increasing the number of shares reserved
under the 1998 Stock Option Plan on July 18 , 1999, subject to stockholder
approval at this special meeting and adopted the amendment fixing the maximum
number of shares subject to awards granted to an individual in a calendar year
on September 21, 1999.
The 1998 Stock Option Plan, along with each of the other stock option plans
and stock option grants of IDM and Fusion Networks, will be assumed and adopted
by FNHI and all options granted by IDM and Fusion Networks will be deemed to
constitute options to purchase common stock of FNHI following the merger. The
share increase will assure that a sufficient reserve of common stock remains
available under the 1998 Stock Option Plan in order to allow IDM, prior to the
merger, and FNHI, following the merger, to continue to utilize equity incentives
to attract and retain the services of key individuals essential to the long-term
growth and financial success of FNHI. IDM has relied significantly on equity
incentives in the form of stock option grants in order to attract and retain key
employees and believes that such equity incentives are necessary for IDM, and
ultimately FNHI, to remain competitive in the marketplace for executive talent
and other key employees (for purposes of this discussion regarding the 1998
Stock Option Plan, the term the "Company" refers to IDM prior to the merger and
FNHI after the merger). Option grants made to newly-hired or continuing
employees will be based on both competitive market conditions and individual
performance.
The following is a summary of the principal features of the 1998 Stock
Option Plan, as most recently amended. Any stockholder of IDM who wishes to
obtain a copy of the actual plan document may do so upon written request to IDM
at 396 Whitehead Avenue, South River, New Jersey 08882, Attn: Michael Killeen.
General
The purpose of the 1998 Stock Option Plan is to provide a means of
providing employees of the Company and its subsidiaries and directors and
consultants of the Company the benefits of ownership of common stock. The 1998
Stock Option Plan is designed to help attract and retain personnel of superior
ability for positions of exceptional responsibility, to reward employees,
directors and consultants for past services and to motivate such individuals
through added incentives to further contribute to the future growth and the
success of the Company.
Under the 1998 Stock Option 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,
all generally in the discretion of the committee responsible for administering
the plan. Each Award under the 1998 Stock Option 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. Except for the cap on Award grants to an
individual in a calendar year, pursuant to the proposed amendment submitted for
approval by the stockholders, and the limitations with respect to incentive
stock options described below, there is no maximum number of persons eligible to
receive Awards under the 1998 Stock Option Plan, nor is there any limit on the
amount of Awards that may be granted to any such person. IDM intends that stock
options or other grants of Awards under the 1998 Stock Option 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").
IDM originally reserved 1,000,000 shares of its common stock for issuance
under the 1998 Stock Option Plan, subject to adjustment to protect against
dilution in the event of certain changes in capitalization of IDM. Following a
1-for-10 reverse stock split in April 1999, the shares reserved for issuance
under the 1998 Stock Option Plan was reduced to 100,000 shares. Subject to
stockholder approval of this proposal, the number of shares reserved for
issuance under the 1998 Stock Option Plan will be increased by 1,600,000 to
1,700,000 shares.
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Administration
The 1998 Stock Option Plan is administered by a committee of the Board of
Directors of the Company that consists of two or more directors (the
"Committee"). To the extent necessary to comply with Rule 16b-3, the Committee
will consist solely of two or more "non-employee directors," as that term is
defined in Rule 16b-3. Under the 1998 Stock Option Plan, generally the Committee
has complete authority to determine the persons to whom Awards will be granted
from time to time, as well as the terms and conditions of such Awards. The
Committee also has discretion to interpret the plan and the Awards granted under
the plan and to make other determinations necessary or advisable for the
administration of the plan. Under the 1998 Stock Option Plan, the full Board of
Directors can act as the Committee, if all of the members of the Board of
Directors otherwise are eligible to serve on the Committee. The full Board of
Directors generally also may grant Awards under the 1998 Stock Option Plan from
time to time. The Compensation Committee of the Board of Directors acts as the
Committee until otherwise determined by the Board of Directors.
Stock Options
General. The Committee may grant either incentive stock options (for
purposes of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code")) or nonqualified stock options under the 1998 Stock Option Plan. Except
as described below for incentive stock options, the Committee generally has the
discretion to determine the persons to whom stock options will be granted, the
numbers of shares subject to such options, the exercise prices of such options,
the vesting schedules with respect to such options, the terms of such options,
as well as the period, if any, following a participant's termination of service
(as defined in the 1998 Stock Option Plan) during which such option may be
exercised, and the circumstances in which all or a portion of an option may
become immediately exercisable or be forfeited. The Committee also has the
discretion, exercisable either at the time an option is granted or at the time
of a participant's termination of service, to provide for accelerated vesting of
the exercisability of an option for a limited period following such termination
of service. Such terms may differ among the various persons to whom the options
are granted and among the various options granted to any such person.
Notwithstanding the foregoing, under the terms of the 1998 Stock Option Plan, no
options may be exercised following the termination of service of a participant
for cause.
In the discretion of the Committee, the price due upon exercise of an
option may be paid in cash or in shares of company common stock valued at their
then current fair market value (as defined in the plan), or a combination of
both. Shares delivered in payment of such price may be shares acquired by prior
exercises of options or otherwise, in the Committee's discretion. Also in the
discretion of the Committee, a participant may exercise an option as to only a
part of the shares covered thereby and then, in an essentially simultaneous
transaction, use the shares so acquired in payment of the exercise price for
additional option shares.
Generally, options granted under the 1998 Stock Option Plan may not be
transferred by a participant other than by will or by the laws of descent and
distribution and generally will be exercisable during the participant's lifetime
only by such participant or his or her guardian or legal representative. With
respect to nonqualified stock options, however, the Committee may, in its sole
and absolute discretion, permit a participant to transfer such option for no
consideration to or for the benefit of one or more members of the participant's
immediate family (as defined in the plan) or in certain circumstances family
trusts, partnerships or limited liability companies.
The Committee may also, in its discretion, allow the voluntary surrender of
all or a portion of a stock option conditioned upon the granting to the
participant of a new stock option for the same or a different number of shares,
or may require the surrender as a condition precedent to the grant of a new
stock option. The Committee may also purchase a participant's outstanding
option, on such terms and conditions as the Committee in its discretion
determines.
Holders of options shall have no rights as shareholders of the Company
unless and until such options are exercised and shares are delivered to such
persons in accordance with the 1998 Stock Option Plan.
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Incentive Stock Options. Incentive stock options may be granted only to
persons who are employees of the Company or its subsidiaries (including
directors of the Company who are also employees of the Company or a subsidiary
but excluding non-employee directors of the Company). Generally, incentive stock
options must be granted within ten years of the date the 1998 Stock Option Plan
was adopted, and the term of any incentive stock option may not exceed ten
years. Furthermore, the aggregate fair market value of shares of common stock
with respect to which any incentive stock options are exercisable for the first
time by a participant during any calendar year, whether such incentive stock
options are granted under the 1998 Stock Option Plan or any other plans of the
Company, may not exceed $100,000. Under the plan, however, if the aggregate fair
market value of such incentive stock options exceeds this limit (whether due to
its original terms, or due to accelerated exercisability following a termination
of service due to death, disability or retirement (as such terms are defined in
the plan), or following a change of control (hereinafter defined)), then to the
extent permitted by Section 422 of the Code, the excess will be treated as a
nonqualified stock option. Furthermore, the exercise price of incentive stock
options must be at least 100% of the fair market value of the common stock at
the time the incentive stock option is granted, except in the case of incentive
stock options granted to any individual who owns more than 10% of the total
combined voting power of all classes of stock of the Company, in which case the
exercise price of incentive stock options must be at least 110% of the fair
market value of the common stock at the time of grant.
The 1998 Stock Option Plan also provides that, with respect to incentive
stock options, the period during which an option may be exercisable following a
termination of service generally may not exceed three months, unless (i)
employment is terminated as the result of disability, in which case in the
discretion of the Committee the incentive stock options may be exercised during
a period of one year following the date of such disability, or (ii) employment
is terminated as the result of death, or if the employee dies following a
termination of service (other than as a result of disability) and during the
period that the incentive stock option is still exercisable, in which case in
the discretion of the Committee the incentive stock option may be exercised
during a period of one year following the date of such death. In no event,
however, may an incentive stock option be exercised after the expiration of its
original term.
Restricted Stock, Stock Awards and Performance Shares
Under the 1998 Stock Option Plan, the Committee has broad discretion to
grant other equity-based incentives and/or compensation in the form of
restricted stock or other stock awards, as well as performance shares.
Restricted Stock. The Committee may award shares of restricted stock under
the 1998 Stock Option Plan to any eligible person, for such consideration, if
any, as may be determined by the Committee or required by law, as a reward for
past service and an incentive for the performance of future services that will
contribute materially to the successful operation of the Company or its
subsidiaries. Restricted stock generally consists of shares of Common Stock that
at the time of award are subject to restrictions or limitations as to the
participant's ability to sell, transfer, pledge or assign such shares. Shares of
restricted stock may vest (separately or in combination), and all or a portion
of the applicable restrictions may lapse, from time to time over one or more
restricted periods, based on such factors as continued employment, the passage
of time or other measures as the Committee determines. The Committee also may
determine the circumstances, if any, in which shares of restricted stock that
have not previously vested may be forfeited by the participant or may be
required to be resold to the Company, as well as the circumstances, if any, in
which the vesting of such shares might be accelerated or delayed. Generally, in
the discretion of the Committee, any shares of restricted stock that have not
vested in full will be forfeited upon the participant's termination of service
and shall be canceled by the Company. Unless otherwise provided in the
applicable award agreement, however, the Committee may in its discretion waive
any remaining restrictions in the event of the death, disability or retirement
of the participant during the applicable restricted period or in other cases of
special circumstances. Notwithstanding the foregoing, under the terms of the
1998 Stock Option Plan all shares of restricted stock which have not vested in
full shall be forfeited and canceled if the participant is terminated for cause,
as determined by the Committee. In the discretion of the Committee, cash
dividends with respect to shares of restricted stock may be automatically
reinvested in additional shares of stock subject to the same restrictions, or
cash dividends (or other distributions) with respect to such shares may be
withheld by the Committee for the account of the participant, with or without
interest. Except as expressly provided otherwise, persons to whom shares of
restricted stock have been awarded will have all rights of a shareholder of the
Company with respect to such shares, unless and until such shares are otherwise
forfeited by such person.
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Stock Awards. The Committee may grant stock awards under the 1998 Stock
Option Plan to any eligible person in payment of compensation that has been
earned or as compensation to be earned. All shares subject to a stock award
shall be valued at not less than 100% of the fair market value of the shares of
common stock on the grant date of such stock award. Upon the issuance of shares
subject to a stock award and the delivery of certificate(s) representing such
shares to the participant, the participant will become a shareholder of the
Company fully entitled to receive dividends, to vote and to exercise all other
rights of a shareholder of the Company with respect to such shares.
Performance Shares. The Committee may award performance shares under the
1998 Stock Option Plan to any eligible person, for such consideration, if any,
as may be determined by the Committee or required by law, as an incentive for
the performance of future services that will contribute materially to the
successful operation of the Company and its subsidiaries. A performance share
generally consists of a unit valued by reference to the common stock; the value
of one performance share will be equal at any given time to the fair market
value of one share of common stock. Performance shares generally may be earned
by a participant only if the participant achieves certain performance objectives
that are determined by the Committee at the time of the award. The performance
objectives generally will be measured over one or more performance periods
applicable to the Award of such shares as determined by the Committee at the
time of the award. The Committee also has the discretion to determine the number
of performance shares that will be paid to a participant if the applicable
performance objectives are exceeded or met in whole or in part and the form of
settlement of a performance share. Performance objectives may vary from
participant to participant and will be based on such performance criteria (for
example, minimum earnings per share or return on equity) as the Committee in its
sole discretion determines appropriate. The Committee also has the discretion to
revise the performance objectives during the duration of the performance period
if it determines that significant events that have a substantial effect on the
existing performance objectives have occurred. Generally, any performance shares
that have not been earned in full will be forfeited upon a participant's
termination of service. Unless otherwise provided in the applicable award
agreement, however, in the event of the death, disability or retirement of the
participant during the performance period or in other cases of special
circumstances, the Committee may in its discretion determine to make a
settlement of such performance shares based on the extent to which the
applicable performance objectives were satisfied and pro rated for the portion
of the period during which the participant was employed. Notwithstanding the
foregoing, under the terms of the 1998 Stock Option Plan all performance shares
which have not been earned in full shall be forfeited and canceled if the
participant is terminated for cause, as determined by the Committee.
The settlement of a performance share may be made in cash, in whole shares
of common stock or any combination thereof. Performance shares are not
transferable by a participant, and holders of performance shares shall have no
rights as shareholders of the Company unless and until shares of common stock
are issued and delivered to such persons upon settlement of performance shares,
as provided in the 1998 Stock Option Plan. The Committee may also, in its
discretion, place restrictions on the transfer of any shares of common stock
delivered to the participant in payment of the performance shares.
Changes of Control or Other Fundamental Change
The 1998 Stock Option Plan provides that upon certain mergers or other
reorganizations to which the Company or any subsidiary is a party that involves
an exchange or conversion or other adjustment of the Company's outstanding
common stock, each participant generally shall be entitled upon the exercise of
his or her stock options to receive the number and class of securities or other
property to which such participant would have been entitled in the merger or
reorganization if such participant had exercised such stock option prior to such
merger or reorganization. The Committee, in its discretion, may provide for
similar adjustments upon the occurrence of such events with respect to other
Awards outstanding under the 1998 Stock Option Plan.
The 1998 Stock Option Plan also provides that, upon the occurrence of a
change of control: (i) outstanding stock options will become immediately
exercisable in full (subject to any appropriate adjustments in the number of
shares subject to the option and the option price), regardless of their terms,
and shall remain exercisable for the remaining term of the option; (ii)
outstanding performance shares will be deemed 100% earned and a pro rata portion
of such performance shares (based on the portion of the applicable performance
period that has elapsed at such time) shall be paid to the participant; and
(iii) outstanding shares of restricted stock shall be deemed vested and all
restrictions thereon shall be deemed lapsed. A change of control is defined
under the 1998 Stock Option Plan as (a) the adoption of a plan of merger or
consolidation of the Company with any other corporation or association as a
result of which the holders of the voting capital stock of the Company as a
group would receive less than 50% of the
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voting capital stock of the surviving or resulting corporation, (b) the approval
by the Board of Directors of the Company of an agreement providing for the sale
or transfer (other than as security for obligations of the Company) of
substantially all the assets of the Company, or (c) in the absence of a prior
expression of approval by the Board of Directors of the Company, the acquisition
of more than 20% of the Company's voting capital stock by any person within the
meaning of Section 13(d)(3) of the Exchange Act, other than a person, or group
including a person, who beneficially owned, at the date of adoption of the 1998
Stock Option Plan by the Board of Directors, more than 5.0% of the Company's
voting capital stock. In addition, the Committee generally has the discretion to
take such actions and make such adjustments with respect to outstanding Awards
as it deems necessary or advisable, and fair and equitable, in the event of a
change of control or other similar event.
Upon the dissolution or liquidation of the Company, all outstanding Awards
under the 1998 Stock Option Plan shall terminate. Upon the adoption of a plan of
such dissolution or liquidation, however, all outstanding Awards shall be
exercisable in full and all restrictions shall lapse, to the extent described in
the previous paragraph.
Miscellaneous
The Board of Directors generally may amend or terminate the 1998 Stock
Option Plan or any provision of the 1998 Stock Option Plan at any time. To the
extent required by the Exchange Act or the Code, however, absent approval by the
Company's shareholders, no amendment may (i) materially alter the group of
persons eligible to participate in the 1998 Stock Option Plan; (ii) except as
specifically provided in Section 3.6 of the 1998 Stock Option Plan, increase the
number of shares available for Awards under the 1998 Stock Option Plan; (iii)
extend the period during which incentive stock options may be granted beyond
January 8, 2008; or (iv) alter the class of individuals eligible to receive an
incentive stock option or increase the limit on incentive stock options or the
value of shares of Common Stock for which eligible employees may be granted an
incentive stock option. Furthermore, without the consent of the participant, no
amendment to or discontinuance of the 1998 Stock Option Plan or any provision
thereof shall adversely affect (in the sole discretion of the Committee) any
Award granted to the participant under the 1998 Stock Option Plan, except that
the Committee shall always have the right and power to annul any Award if the
participant is terminated for cause and to convert any outstanding incentive
stock option to a nonqualified stock option.
If a participant is required to pay to the Company any amount with respect
to income or employment tax withholding obligations in connection with an Award,
no common stock will be transferred to such participant until the Committee in
its sole discretion is satisfied as to the payment of such liabilities. The
Committee in its discretion may allow a participant to satisfy any such
obligation by withholding shares of common stock that otherwise would be
delivered to such participant with a fair market value equal to the amount of
the withholding obligation.
Federal Income Tax Consequences
The following is a brief description of the Federal income tax consequences
to the participants and the Company of the issuance and exercise of stock
options under the 1998 Stock Option Plan, as well as the grant of restricted
stock, stock awards and performance shares. All ordinary income recognized by a
participant with respect to Awards under the 1998 Stock Option Plan shall be
subject to both wage withholding and employment taxes. The deduction allowed to
the Company for the ordinary income recognized by a participant with respect to
an Award under the 1998 Stock Option Plan will be limited to amounts that
constitute reasonable, ordinary and necessary business expenses of the Company.
Incentive Stock Options. In general, no income will result for Federal
income tax purposes upon either the granting or the exercise of any incentive
option issued under the 1998 Stock Option Plan. If certain holding period
requirements (at least two years from the date of grant of the option and at
least one year from the date of exercise of the option) are satisfied prior to a
disposition of stock acquired upon exercise of an incentive option, the excess
of the sales price upon disposition over the option exercise price generally
will be recognized by the participant as a capital gain, and the Company will
not be allowed a business expense deduction.
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If the holding period requirements with respect to incentive options are
not met, the participant generally will recognize, at the time of the
disposition of the stock, ordinary income in an amount equal to the difference
between the option price of such stock and the lower of the fair market value of
the stock on the date of exercise and the amount realized on the sale or
exchange. The difference between the option price of such stock and the fair
market value of the stock on the date of exercise is a tax preference item for
purposes of calculating the alternative minimum tax on an participant's federal
income tax return. If the amount realized on the sale or exchange exceeds the
fair market value of the stock on the date of exercise, then such excess
generally will be recognized as a capital gain. In the case of a disposition
prior to satisfaction of the holding period requirements which results in the
recognition of ordinary income by the participant, the Company generally will be
entitled to a deduction in the amount of such ordinary income in the year of the
disposition.
If a participant delivers shares of the Company's common stock in payment
of the option price, the participant generally will be treated as having made a
like-kind exchange of such shares for an equal number of the shares so
purchased, and no gain or loss will be recognized with respect to the shares
surrendered to the Company in payment of said option price. In such a case, the
participant will have a tax basis in a number of shares received pursuant to the
exercise of the option equal to the number of shares of Common Stock used to
exercise the option and equal to such participant's tax basis in the shares of
Common Stock submitted in payment of the option price. The remaining shares of
Common Stock acquired pursuant to the exercise of the option will have a tax
basis equal to the gain, if any, recognized on the exercise of the option and
any other consideration paid for such shares on the exercise of the option.
Notwithstanding the foregoing, if a participant delivers any stock that was
previously acquired through the exercise of an incentive stock option in payment
of all or a portion of the option price of an option, and the holding period
requirements described above have not been satisfied with respect to the shares
of stock so delivered, the use of such stock to pay a portion of the option
price will be treated as a disqualifying disposition of such shares, and the
participant generally will recognize income.
Nonqualified Stock Options. The grant of nonqualified stock options under
the 1998 Stock Option Plan will not result in any income being taxed to the
participant at the time of the grant or in any tax deduction for the Company at
such time. At the time a nonqualified stock option is exercised, the participant
will be treated as having received ordinary income equal to the excess of the
fair market value of the shares of common stock acquired as of the date of
exercise over the price paid for such stock. At that time, the Company will be
allowed a deduction for Federal income tax purposes equal to the amount of
ordinary income attributable to the participant upon exercise. The participant's
holding period for the shares of common stock acquired will commence on the date
of exercise, and the tax basis of the shares will be the greater of their fair
market value at the time of exercise or the exercise price.
Restricted Stock. If a participant receiving a grant of restricted stock
under the 1998 Stock Option Plan makes an election with respect to such shares
under Section 83(b) of the Code not later than 30 days after the date the shares
are transferred to the participant pursuant to such grant, the participant will
recognize ordinary income at the time of receipt of such restricted stock in an
amount equal to the excess of the fair market value of the shares of common
stock as of the date of receipt (determined without regard to any vesting
conditions or other restrictions other than a restriction which by its terms
will never lapse) over the price paid (if any) for such restricted stock. In the
absence of such an election, the participant will recognize ordinary income at
the time the restrictions lapse in an amount equal to the excess of the fair
market value of the shares of common stock as of the date the restrictions lapse
over the price paid (if any) for such stock. At the first to occur of the
election or the lapsing of the restrictions, the Company will be allowed a
deduction for Federal income tax purposes equal to the amount of ordinary income
attributable to the participant. The participant's holding period for the shares
of common stock acquired will commence upon the first to occur of the date the
participant makes an election under Section 83(b) of the Code or on the date
that the restrictions lapse, and the tax basis of the shares will be the greater
of their fair market value on that date or the price paid for the shares (if
any).
If an election is made under Section 83(b) of the Code, dividends received
on shares of restricted stock will be treated as ordinary income. If a
participant does not make an election under Section 83(b) of the Code, dividends
received on the shares of restricted stock prior to the date that such
restrictions lapse will be treated as additional compensation and not as
dividend income for Federal income tax purposes.
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If (i) an election is made under Section 83(b) of the Code and (ii) before
the restrictions on the shares lapse, the shares which are subject to such
election are forfeited to or reacquired by the Company, then (A) no deduction
would be allowed to such participant for the amount included in the income of
such participant by reason of such election, and (B) the participant would
realize a loss in an amount equal to the excess, if any, of the ordinary income
previously recognized by the participant with respect to such shares over the
value of such shares at the time of forfeiture. Such loss would be a capital
loss if the shares are held as a capital asset at such time. In such event, the
Company would be required to include in its income the amount of any deduction
previously allowable to it in connection with the transfer of such shares.
Stock Awards. At the time a stock award is granted, the participant will be
treated as having received ordinary income equal to the fair market value of the
shares of common stock acquired. At that time, the Company will be allowed a
deduction for federal income tax purposes equal to the amount of ordinary income
which the participant receives. The participant's holding period for the shares
of common stock acquired will commence on the date of grant, and the tax basis
of the shares will be their fair market value at that time.
Performance Shares. At the time performance shares are earned, the
participant will be treated as having received ordinary income equal to the fair
market value of the shares of common stock subject to such performance shares,
whether such performance shares are settled in cash of by delivery of shares of
common stock. At that time, the Company will be allowed a deduction for federal
income tax purposes equal to the amount of ordinary income which the participant
receives. The participant's holding period for the shares of common stock
acquired (if any) will commence on the date of grant, and the tax basis of such
shares will be their fair market value at that time.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with the disqualifying disposition of incentive stock option shares
or the exercise of non-statutory options with exercise prices equal to the fair
market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).
Accounting Treatment
Because the exercise price of option grants under the 1998 Stock Option
Plan must be equal to or greater than the fair market value of the option shares
on the grant date, option grants under the 1998 Stock Option Plan will not
result in any direct charge to the Company's reported earnings. However, the
fair value of those options is required to be disclosed in the notes to the
Company's financial statements, and the Company must also disclose, in footnotes
to the Company's financial statements, the pro-forma impact those options would
have upon the Company's reported earnings were the fair value of those options
at the time of grant treated as a compensation expense. In addition, the number
of outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis.
On March 31, 1999, the Financial Accounting Standards Board issued an
exposure draft of a proposed interpretation of APB Opinion No. 25 governing the
accounting principles applicable to equity incentive plans. Under the proposed
interpretation, option grants made to non-employee Board members or consultants
after December 15, 1998 will result in a direct charge to the Company's reported
earnings based upon the fair value of the option measured initially as of the
grant date and then subsequently on the vesting date of each installment of the
underlying option shares. Such charge will accordingly include the appreciation
in the value of the option shares over the period between the grant date of the
option (or, if later, the effective date of the final interpretation) and the
vesting date of each installment of the option shares.
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New Plan Benefits
The following table shows plan benefits that would accrue to or be
allocated to each of the Company's Chief Executive Officer, the four other most
highly compensated executive officers of the Company (with base salary and bonus
for the past fiscal year in excess of $100,000), all nominees for election as
directors, all executives as a group, all non-executive directors as a group and
all non-executive officer employees as a group on the basis of the share
increase which is the subject of this Proposal. Those options will not become
exercisable for any of the option shares unless the stockholders approve this
Proposal.
Joel A. Freedman 400,000 (1)
President, Chief Executive Officer and Director 100,000 (2)
Frank A. Falco 400,000 (1)
Chairman of the Board, Executive Vice President 100,000 (2)
and Chief Operating Officer
Michael B. Killeen 9,000 (1)
Chief Financial Officer and Director 15,000 (2)
Birger Munck 6,000 (1)
President - IDM Energy 10,000 (3)
John M. Tuohy 6,500 (1)
Vice President Nuclear Services 10,000 (3)
Richard Keller 10,000 (1)
Director 5,000 (2)
Robert McGuinness 10,000 (1)
Director 5,000 (2)
Frank Patti 10,000 (1)
Director 5,000 (2)
Mark Franceschini 10,000 (1)
Director 5,000 (2)
All current executive officers as a group (8 persons) 839,500 (1)
260,000 (2)(3)
All current directors, excluding executives, as a group (4 persons)40,000 (1)
20,000 (2)
All employees, excluding executive officers, as a group 30,000 (1)
215,000 (3)
(1) Options exercisable at $1.156 per share, vesting six months from the date
of grant and expiring July 2009.
(2) Options exercisable at $11.81 per share, vesting on shareholder approval.
(3) Options exercisable at $11.81 per share, vesting between June 15, 2000 and
December 15, 2000 and expiring January 2010.
Options to acquire a total of 1,409,500 shares of common stock have been
granted to date on the basis of the proposed increase in shares reserved under
the 1998 Stock Option Plan. The closing price of IDM's common stock on the
Nasdaq SmallCap Market on January 21, 2000 was $11.81.
Vote Required
The affirmative vote of at least a majority of the shares of common stock
present in person or by proxy at the Special Meeting and entitled to vote is
required for approval of the amendment to the 1998 Stock Option Plan. Should
such stockholder approval not be obtained, then the 1,600,000 share increase to
the share reserve under the 1998 Stock Option Plan will not be implemented, any
stock options granted under the 1998 Stock Option Plan on the basis of that
increase will immediately terminate without ever becoming exercisable for the
shares of common stock subject to those options, and no additional options or
stock issuances will be made on the basis of such share increase. The 1998 Stock
Option Plan will, however, continue in effect, and option grants and direct
stock issuances may continue to be made under the 1998 Stock Option Plan until
all the shares of common stock available for issuance under the 1998 Stock
Option Plan has been issued pursuant to such option grants and direct stock
issuances. The approval of the proposal to amend the 1998 Stock Option Plan is
not conditional on the approval of the merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENTS TO THE COMPANY'S 1998 COMPREHENSIVE STOCK OPTION AND AWARD PLAN.
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EXPERTS
The consolidated financial statements of IDM Environmental Corp. at
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, included in the joint proxy statement/prospectus of IDM
Environmental Corp. and Fusion Networks, Inc., which is referred to and made a
part of this prospectus and registration statement, have been audited by Samuel
Klein & Co., independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements of Fusion Networks, Inc. at September 30, 1999 and
the period from inception to that date included in the joint proxy
statement/prospectus of IDM Environmental Corp. and Fusion Networks, Inc., which
is referred to and made a part of this prospectus and registration statement,
have been audited by Samuel Klein & Co., independent auditors, as set forth in
their reports appearing elsewhere herein, and are included in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of FNHI common stock offered by this joint proxy
statement/prospectus has been passed upon by Vanderkam & Sanders, Houston,
Texas. Certain legal matters with respect to federal income tax consequences in
connection with the holding company reorganization have been passed upon for IDM
by Friedman Siegelbaum LLP, Roseland, New Jersey. Certain legal matters with
respect to federal income tax consequences in connection with the merger have
been passed upon for Fusion Networks by Silverstein and Mullens, P.L.L.C.,
Washington, D.C. Michael Sanders, a partner in the firm of Vanderkam & Sanders,
holds 12,000 options to purchase common stock of IDM.
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WHERE YOU CAN FIND MORE INFORMATION
IDM files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. Shareholders may read
and copy any reports, statements or other information filed by IDM at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. IDM's filings with the Commission are
also available to the public from commercial document-retrieval services and at
the Web site maintained by the Commission at http://www.sec.gov.
FNHI has filed a registration statement with the Commission to register the
FNHI common stock to be issued in the merger. This joint proxy
statement/prospectus is a part of that registration statement and constitutes a
proxy statement and prospectus of IDM in addition to being a proxy statement of
Fusion Networks for use at its special meeting.
IDM has supplied all information contained in this joint proxy
statement/prospectus relating to IDM, and Fusion Networks has supplied all
information contained in this joint proxy statement/prospectus relating to
Fusion Networks. Neither IDM nor Fusion Networks warrants the accuracy or
completeness of information relating to the other. FNHI is responsible for the
accuracy and completeness of the disclosure in the proxy statement/prospectus.
Stockholders can obtain any of the reports referenced above through IDM, Fusion
Networks or the Commission. Documents are available from IDM or Fusion
Networks without charge, excluding all exhibits. Stockholders may obtain
such documents by requesting them orally or in writing to the following
addresses or by telephone:
For IDM: For Fusion Networks:
IDM Environmental Corp. Fusion Networks, Inc.
Attn: Michael Killeen Attn: Enrique Bahamon
396 Whitehead Ave. 8115 N.W. 29th Street
South River, New Jersey 08882 Miami, Florida 33122
(732) 390-9550 (305) 477-6701
If you would like to request documents, please do so by March 16, 2000 in
order to receive them before the IDM special meeting and by March 16, 2000 in
order to receive them before the Fusion Networks special meeting.
IDM stockholders should rely only on the information contained in this
joint proxy statement/prospectus to vote on the holding company reorganization,
the merger and the proposed plan amendment. Fusion Networks shareholders should
rely only on the information contained in this joint proxy statement/prospectus
to vote on the merger agreement and the merger. Neither IDM nor Fusion Networks
has authorized anyone to provide information that is different from what is
contained in this joint proxy statement/prospectus. This joint proxy
statement/prospectus is dated February 24, 2000. Shareholders should not
assume that the information contained in this joint proxy statement/prospectus
is accurate as of any other date, and neither the mailing of this joint proxy
statement/prospectus to shareholders nor the issuance of FNHI common stock in
the merger shall create any implication to the contrary.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
IDM Environmental Corp.
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
Consolidated Balance Sheets as of September 30, 1999 and December
31, 1998 (Unaudited)................................................. F-39
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited)............................. F-40
Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 (Unaudited)............................. F-41
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)............................. F-42
Notes to Consolidated Financial Statements (Unaudited)............... F-44
Fusion Networks, Inc.
Independent Auditor's Report......................................... F-48
Consolidated Balance Sheet as of September 30, 1999.................. F-49
Consolidated Statement of Operations for the Period from Inception
(July 1, 1999) to September 30, 1999................................. F-50
Consolidated Statements of Stockholders' Equity for the Period from
Inception (July 1, 1999) to September 30, 1999........................ F-51
Consolidated Statements of Cash Flows for the Period from Inception
(July 1, 1999) to September 30, 1999.................................. F-52
Notes to Consolidated Financial Statements........................... F-53
138
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
IDM Environmental Corp. and Subsidiaries
South River, New Jersey
We have audited the accompanying consolidated balance sheets of IDM
Environmental Corp. and Subsidiaries as of December 31, 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.
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
April 5, 1999
January 24, 2000 as to note 18
F-1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
ASSETS 1998 1997
--------------- ---------------
<S> <C> <C>
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
--------------- ---------------
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 - -
Common Stock Options Exercised 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 1,360 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) -
Warrants Exercised 243,731 2,437 2,620,531 - -
Common Stock Options Exercised 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 $ 29,473 $ 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 from (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 provided by (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
------------- -------------- ------------
Net 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>
F-5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<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 officer's 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 remediation
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 settings 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 unincorporated affiliated joint ventures in which the
ownership of the venture is between 20% and 50% and for which the following
conditions exist: (i) the investors in the ventures have an undivided interest
in the ventures' assets; (ii) each investee is severly liable for the
indebtedness of the venture; and (iii) each investor is only entitled to its pro
rata share of income and is responsible to pay only its pro rata share of
expenses, 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>
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. 1. THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
F-8
<PAGE>
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25
"ccounting for Stock Issued to Employees" ("PB 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>
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 management's 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 Company's 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, while aggressively pursuing
collection of these claims realizes it is possible they will have to 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 was approved
by the general contractor on the project. The general contractor agreed in the
first quarter of 1999 to release the $750,000 retainage on the project. During
the second quarter of 1999 the company agreed to assign their rights to the
claim to the general contractor, based on their inability to fund the legal
costs associated with the claim. In consideration of this assignment the general
contractor advanced the company $650,000, based on an offer from the owner of
$750,000 in settlement of the claim, and also agreed to pay IDM 30% of any
settlement they receive from the owner over and above the initial $650,000. The
claim with respect to the Los Alamos, New Mexico project was settled during the
second quarter of 1999 and the company received $1,000,000 for full settlement
of the claim. 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.
F-10
<PAGE>
2. MANAGEMENT'S PLANS, FINANCIAL RESULTS AND LIQUIDITY (continued)
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
were 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 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 billion. 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. 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 for completion during 1999. However, during September
1999, the Company was terminated from its contract, and subsequently reinstated,
for the Oak Ridge Project. The Company has filed a request for arbitration
relating to the disputes encountered by the Company in performing their contract
and intends to pursue change orders against the contractor.
In addition to existing contracts, the Company continues bidding on, or proposes
to bid on, numerous projects in order to replace revenue from projects which
were lost or expected to 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 November 1998, the Company, through their 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 the Company will have the right to acquire, design,
construct, own and operate electric power facilities in the region.
The 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 the
acquisition of Zages, the Company made an investment in Zages and are performing
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 the technical examination and Zages' efforts to extend the lease on
the plant, IDM Foreign Power Incorporated, an indirect majority-owned
subsidiary, is required to invest, over the operating life of the plant, up to
$9 million of additional funds for rehabilitation and repair of the plant.
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. They anticipate that they 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 commence future projects.
F-11
<PAGE>
2. MANAGEMENT'S PLANS, FINANCIAL RESULTS AND LIQUIDITY (continued)
With respect to the company's El Salvador energy production project, during the
third quarter of 1999 the Company signed a Fee Agreement Memorandum of
Understanding for the sale of their Power Purchase Agreement for $475,000,
subject to finalizing negotiations and execution of a mutually acceptable Power
Purchase Agreement, and is negotiating the sale of the land and permits with two
interested parties for approximately $900,000.
Also during October 1999, the Company was notified by the State of New Jersey
that their application for a Final Transfer Certificate representing
confirmation of the amount of unused Corporation Business Tax Benefits available
for sale was approved. The Company expects to receive approximately $1.25
million for the sale of these cumulative net operating losses.
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, payable $150,000 at closing with $150,000 payable in monthly
installments over eight months. In addition to the potential funding sources
described above the Company is continuing to evaluate the sale of projects and
properties, including properties in Poland and the potential compromise of
various claims for additional compensation. 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 are conducting
ongoing discussions with various potential lenders with a view to establishing
available credit facilities, the Company presently have 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.
In light of the Company's continued losses sustained during the first three
quarters of 1999 and the continued uncertainty effecting operations at the end
of the third quarter of 1999, management has evaluated various options outside
its traditional businesses to return the Company to profitability and to
increase shareholder value. Pursuant to those efforts, in July 1999, the Company
entered into a letter of intent, and subsequently a merger agreement, to merge
with Fusion Networks, Inc. (see Note 17) in exchange for approximately 26
million shares of common stock. Fusion Networks is a newly formed company which
is in the process of building a portal-type web-site with an initial emphasis on
Latin America and the Hispanic market in the United States. The proposed merger
is subject to a number of conditions including approval of the merger by the
shareholders of both the Company and Fusion Networks, receipt by the Company's
board of directors of a "fairness opinion" from an investment banking firm, the
receipt of all necessary regulatory approvals and the negotiation and execution
of definitive documentation. There can be no assurance that the merger will be
successfully implemented or that there will not be modifications to the merger
terms.
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 Life's patented environmental remediation technology for long term
bioremediation of contaminated ground water throughout North America. On
November 3, 1997, the Company invested an additional $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".
F-12
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. ACQUISITIONS AND INVESTMENTS IN AFFILIATES (continued)
Life International Products (Continued)
- ---------------------------
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 CWC's
proprietary Kocee Gas Generator waste treatment technology that converts
municipal solid waste, including tires and plastics, into electrical energy. In
addition, the Company committed to loan up to $1,350,000 over a four month
period to Global Delaware to carry on this newly acquired waste-to-energy
business.
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.
Construction Joint Ventures
- ---------------------------
During 1996 and 1997, the Company entered into joint venture agreements for the
purposes of completing construction related projects, the Company's share of the
joint ventures revenues are anticipated to total approximately $20,225,000,
specifically for work to be performed on the Eastside Reservoir Project for the
Water District of Southern California and building decommissioning 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.
F-13
<PAGE>
DM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. ACQUISITIONS AND INVESTMENTS IN AFFILIATES (continued)
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.
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
=============== ===============
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, $3,134,815 and $3,211,155,
respectively, was outstanding (including interest). During the fourth quarters
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.
F-14
<PAGE>
5. NOTES RECEIVABLE (Continued)
On June 7, 1996, the Company loaned $250,000 to Solucorp Industries, Ltd.
("Solucorp"), an environmental company with which the Company had entered into a
September 7, 1995 Joint Marketing and Operation Agreement relating to the cross
marketing of Solucorp's soil remediation process and the Company's products and
services. The note executed June 7, 1996 (and further amended October 4, 1996),
is secured by shares of Solucorp's common stock. The terms of the note as
amended required 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 of $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.
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
============ ==============
Included in the accompanying balance sheets under the following captions:
<TABLE>
December 31,
1998 1997
------ -------
<S> <C> <C>
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
============ =============
</TABLE>
F-15
<PAGE>
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 Company's inventory of surplus power generating equipment of
$600,000 and $300,000, respectively. Management believes the write-downs were
necessary due to the lack of sales activity and delays in the utilization of
this equipment within projects currently being negotiated by the Company.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
December 31,
1998 1997
------ -------
<S> <C> <C>
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
=============== ===============
</TABLE>
Depreciation and amortization expense is reflected in direct job cost and in
operating expenses including general and administrative expenses. Depreciation
and amortization expense for the years ended December 31, 1998, 1997 and 1996
was $661,469, $713,717 and $668,227, respectively.
For the years ended December 31, 1998, 1997 and 1996, $156,608, $148,526 and $0,
respectively, of total depreciation and amortization expense was reflected in
job costs.
F-16
<PAGE>
9. LONG-TERM DEBT
7% Convertible Notes, Due September 1997
- ----------------------------------------
During the quarter ended September 30, 1995, the Company completed a $5,000,000
private placement offering of 7% convertible notes pursuant to Regulation S
under the Securities Act of 1933, as amended. The notes were due September 15,
1997. The holders of the notes were entitled, at their option, to convert on or
after November 15, 1995 one third of the original principal amount of the notes
into 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 were converted
within one year of their issuance, no interest was 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 Company's common stock.
Due to the lack of a fixed conversion price or other mechanism to limit the
total number of shares exercisable upon conversion of the debt, an inadvertent
violation of the rules applicable to NASDAQ National Market Securities was
determined to have occurred during the first quarter of 1996. To remedy such
problem, the Company imposed a cap on conversions which could not be exceeded
unless the shareholders of the Company first approved the issuance of shares on
conversion in an aggregate amount exceeding 20% of the outstanding shares on the
date of the convertible note issuances. Consequently, the balance of the
Convertible Notes outstanding at March 31, 1996 amounting to $1,750,000 were
subject to a cap on conversions imposed by the Company to assure compliance with
NASDAQ rules. The Company submitted a proposal to its shareholders at its 1996
annual shareholders meeting to permit the conversion of the remaining
Convertible Notes. The proposal was approved and the remaining Notes became
convertible with the conversion price being reduced from 82% of the closing bid
price to 80% of such price and all interest accrued on such Convertible Notes
being payable in shares of common stock.
In connection with the issuance of the convertible notes, the Company paid total
offering costs of approximately $815,000. Such costs were capitalized as
deferred issuance costs and were 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 Company's option. In the event that a registration
statement covering the shares underlying the Convertible Notes has not been
declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes was to be
increased to 18% and 24%, respectively, from those dates until such 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.
F-17
<PAGE>
9. LONG-TERM DEBT (continued)
7% Convertible Notes, Due January 1999 (Continued)
- --------------------------------------
The difference between the market price of the Company's 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 stock's 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.
Long-term debt consists of the following:
<TABLE>
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>
F-18
<PAGE>
9. LONG-TERM DEBT (continued)
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
===============
10. PROVISION (CREDIT) FOR INCOME TAXES
Provision (Credit) for income taxes is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ----- -------
<S> <C> <C> <C>
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)
=============== =============== ==============
</TABLE>
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:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ -------
Amount Amount Amount
<S> <C> <C> <C>
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)
=============== =============== ===============
</TABLE>
F-19
<PAGE>
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:
<TABLE>
December 31,
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
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
=============== =============== ==============
</TABLE>
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 reliability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
temporary differences become deductible and the net operating losses can be
carried forward. In determining such projected future taxable income, management
has considered the Company's historical results of operations, the current
economic environment within the Company's core industries and future business
activities which the company has positioned itself. At December 31, 1998, in
view of the Company's substantial losses over the past several years and
uncertainties regarding future operations, the Company's 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
Company's employees. For purposes of computing the salary of Messrs. Freedman
and Falco, operating profits are defined as net income from operations before
deduction of interest expense, income taxes, depreciation and amortization and
other non-cash charges to income.
F-20
<PAGE>
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 Company's 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 Company's 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>
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.
On February 11, 1996, the Company entered into agreements with its executive
employees pursuant to which such employees have agreed to maintain the
confidentiality of certain information and have agreed to not compete with the
Company within 250 miles of the Company's principal places of business for a
period of three years following the termination of such persons' employment with
the Company. Additionally, the Company has entered into agreements with each of
its executive officers, other than Messrs. Freedman and Falco, which provide
that such officers shall be entitled to (i) a lump sum payment equal to 2.99
times his average annual gross income from the company for the three tax-year
period ending before the date of such termination; (ii) a lump sum payment equal
to three times the value of all "in-the-money" stock options held by such
persons at the date of termination; and (iii) continued participation in all
employee benefit plans or programs for a period of three years, provided that
the employee may, at his election, receive a lump sum cash payment equal to the
value of such benefits in lieu of continued participation in such benefit plans.
For purposes of such agreements, a change in control is defined in the same
manner as in the employment agreements of Messrs. Freedman and Falco, except
that failure of either Mr. Freedman or Mr. Falco to be elected when standing for
election as a director shall not constitute a "change in control" for purposes
thereof.
In addition to the foregoing employment and change of control arrangements, the
Company's 1993 and 1995 Stock Option Plans provide that all outstanding options
shall become fully vested and exercisable in the event of a change in control.
Litigation
- ----------
The Company is periodically subject to lawsuits and administrative proceedings
arising in the ordinary course of business. Management believes that no pending
lawsuits or administrative proceeding is likely to have a material adverse
effect on the condition or results of operations of the Company.
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 OSHA's Review Commission. The Commission
vacated the first alleged wilful citation, but affirmed each of the second and
third wilful citations, imposing a penalty in the amount of $70,000 for each
citation. The Company strongly objects to the Commission's finding on the basis
that it cannot be sustained as matters of fact or law and has filed a timely
Notice of Appeal with the OSHA Review Commission for Discretionary Review, which
body has accepted jurisdiction of the matter on administrative appeal. The
Company is contesting the Citations and Notification of Penalty.
Also in connection with this accidental death, the employee's estate filed a
complaint for wrongful death against the subcontractor and the Company on
February 11, 1997. The estate seeks damages in the amount of $45 million. The
Company is being defended by the subcontractor's insurance carrier pursuant to
the subcontractor's obligation to defend and indemnify the Company with respect
to the actions of its (subcontractor's) employees and agents. The Company will
be fully indemnified for any liability, if any, for any potential judgement or
settlement in this matter by the subcontractors 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 Company's securities between the indicated dates, as well as the
disgorgement of profits allegedly received by some of the individual defendants
from sales of common stock during that period. A written settlement agreement
was executed by plaintiff's 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 Company's
director's and officer's ("D&O") insurance policy carrier pursuant to the
obligations owed by the carrier under the Company's existing D&O policy. The
settlement covered the class period March 8, 1996 to June 5, 1997. The
settlement, as expressly reflected in the settlement documents, has been made as
a business accommodation only, and neither the Company, nor any director,
officer or employee of the Company has admitted or will admit any wrong doing of
any kind. With the closing of the settlement, the action was dismissed with
prejudice and the Company and each of the individuals who have been named as
defendants were released from any and all claims for the entire class period.
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 it's 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 Enviropower's right, title and interest in certain
worldwide marketing and sales agreements and to an exclusive, irrevocable
license granted to Global Delaware to market and use certain technology outside
Canada in connection with the environmentally safe conversion of certain
domestic industrial and agricultural solid waste into energy (the "Technology").
Enviropower 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 it's exclusive rights to the licensed technology
throughout the pendency of the action and until further order of the court.
Enviropower has since filed for protection under Canadian bankruptcy laws,
staying all proceedings between the Company and Enviropower. 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, it's subsidiary, Global Waste & Energy and certain
affiliates and officers in the Court of Queen's Bench of Alberta, Judicial
District of Calgary. The plaintiff alleges that the Company and it's affiliates
breached a marketing agreement that had been entered into 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, are being 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>
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 Company's 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 Company's 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>
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
1998 and 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>
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 Company's common stock
beginning on the 91st calendar day after the closing date according to the
following:
Lower of x or y
x y
Calendar Days Closing Date Conversion Date
After Closing Average Times Average Times
------------- ------------- --------------
91 - 120 120% 82%
121 - 150 110% 79%
151 - 180 100% 76%
180 100% 73%
The conversion date average 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 Company's 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 Company's 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>
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 Company's 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 Company's 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 Company's 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 Company's
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 Company's option.
During the year ended December 31, 1998, 1,285 shares of Series RR Preferred
Stock were converted into 359,981 shares of the Company's common stock.
Subsequent to December 31, 1998, demand for conversion or redemption of the
remaining 215 shares of Series RR Preferred Stock had been submitted. As of
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.
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 Company's 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>
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 underwriter's over allotment options) in April of
1994. Each Unit consisted of one share of the Company's common stock and one
Class A Warrant. The Company received $11,792,588 from the proceeds of the
offering, 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 officer's 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 Company's
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 officer's 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 Company's Convertible
Preferred Stock were converted into 19,292 shares of the Company's 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 Company's 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 Company's Common Stock and Class A Warrants, the term of the Class A
Warrants was extended to April of 2000.
F-29
<PAGE>
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 Company's 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 Company's 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 Company's 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 Company's
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 Company's common stock at the date of grant. The options
are incentive stock options, except for the Director's stock option which is a
nonqualified stock option. The options are exercisable until April 2004. Twenty
percent of the options vest three months from the date of grant. The balance of
the options vest at a rate of twenty percent per year on each of the four
anniversary dates subsequent to the grant of the options. 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>
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 Company's 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 Company's common stock at the date of the grant. On August
9, 1995, the Company granted an option to a new employee to purchase 500 shares
of the Company's common stock at $52.50 per share, the market price of the
Company's 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 Company's common stock, less the exercise price, of
which is equal to the aggregate exercise price of the shares of common stock
issuable upon exercise of the option. Under such provision of the accelerated
vesting, notwithstanding any vesting schedule set forth in any individual option
agreement, all options granted under the 1993 Plan will become fully vested and
exercisable in the event a person or group, other than Joel Freedman or Frank
Falco, acquire in excess of 15% of common stock of the Company unless such
acquisition is approved by the Board.
On January 8, 1996, the Company's Compensation Committee and Board of Directors
adopted and approved a new stock option plan for the Company, the IDM
Environmental Corp. 1995 Stock Option Plan (the "1995 Plan"), under which stock
option awards may be made to employees, directors and consultants of the
Company. The 1995 Plan became effective on the date it was adopted by the Board
of Directors 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 Company's common stock at $29.40
per share, the market price of the Company's 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 Company's 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 Company's 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 Company's 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 Company's 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>
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 Company's
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
Company's 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 Company's 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 Company's
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 Company's 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 Company's 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 Company's common stock at $37.19 per share, the
market price of the Company's 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>
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 Company's common stock at
$35.00 per share, the market price of the Company's 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 Company's 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 $1,898,550, $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 Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1993, 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 Company's 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 Company's 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:
<TABLE>
1998 1997 1996
------ ------- ---------
<S> <C> <C> <C>
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 - 105% 92% 72 - 87%
Expected life of options 3 - 10 years 1 - 5 years 2 - 5 years
</TABLE>
Fair values for future options are to be estimated at the date of grant.
F-33
<PAGE>
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 Company's stock options have characteristics significantly different from
those of traded options, and because changes in subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options. In management's opinion existing stock option valuation
models do not provide a reliable single measure of the fair value of employee
stock options that have vesting provisions and are not transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility.
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 Company's pro forma information as
follows:
<TABLE>
1997 1997 1996
------ ------ -------
<S> <C> <C> <C>
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)
</TABLE>
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>
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>
<S> <C> <C> <C> <
Weighted
Number Price per Average
of Shares Share Exercise Price
Outstanding at 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>
15. STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
A summary of changes in common stock options under 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 changes in common stock options under the 1998 plan activity which
occurred during 1998 is as follows:
<TABLE>
Weighted
Number of Price per Average
Shares Share 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, 1998 12,570 $6.75 - $37.20 $14.30
===========
Available for future grants 81,660
===========
</TABLE>
F-36
<PAGE>
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, 998 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
Shareholder's Rights Plan
- -------------------------
On April 1, 1996, the Board of Directors adopted and approved a "Shareholder
Rights Plan" in order to preserve for stockholders the long-term value of the
Company in the event of a take-over. To put the Plan into effect, the Board
declared a dividend of one Right for each share of common stock outstanding to
stockholders of record at the close of business on April 1, 1996. Each right
represents the right to purchase one one-hundredth of a share of a new series of
preferred stock without voting rights par value $1.00 per share. The exercise
price for each right is $20.00. Each right expires December 31, 2005.
The rights are not exercisable and are not transferrable apart from the
Company's common stock until the tenth day after such time as a person or group
acquires beneficial ownership of 15% or more of the Company's common stock or
the tenth business day (or such later time as the board of directors may
determine) after a person or group announces its intention to commence or
commences a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the Company's common
stock. As soon as practicable after the rights become exercisable, separate
right certificates would be issued and the rights would become transferrable
apart from the Company's common stock. In the event a person or group were to
acquire a 15% or greater position in the Company, each right then outstanding
would "flip in" and become a right to receive that number of shares of common
stock of the Company which at the time of the 15% acquisition had a market value
of two times the exercise price of the rights. The acquirer who triggered the
rights would become excluded from the "flip-in" because his rights would become
null and void upon his triggering the acquisition. The rights are redeemable by
the Company's Board of Directors at a price of $.01 per right at any time prior
to the acquisition by a person or group of beneficial ownership of 15% or more
of the Company's common stock. The redemption of the rights may be effective at
such time, on such basis, and with such conditions as the board of directors in
its sole discretion may establish. Thus, the rights would not interfere with a
negotiated merger or a white knight transaction, even after a hostile tender
offer has been commenced.
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 Company's
losses from continuing operations.
F-37
<PAGE>
17. SUBSEQUENT EVENTS
During March 1999, 97,525 of the $30.00 warrants were converted into 97,525
shares of the Company's common stock. The exercise price of the warrants paid in
full the loan from shareholders of $265,122 outstanding at December 31, 1998. In
addition, holders of 10,474 Three Year Warrants exercised their rights which
resulted in the issuance of 10,474 shares of the Company's common stock and the
Company received proceeds of $34,564.
During June, 1999, the Company issued 125,000 shares of its common stock as an
inducement on a $400,000 6.5%promissory note received from stockholders of the
Company. The note which was payable in full on August 2, 1999 was repaid in full
by November 1999. The shares issued in conjunction with this note bear
registration rights and a provision whereby penalty shares will be issued should
a registration statement not be filed within 90 days of August 2, 1999. The
Company recorded $109,380, the estimated fair market value of the 125,000 shares
at the date of issuance, as additional interest expense.
On July 18, 1999, the Board of Directors of the Company approved a proposal
increasing the number of shares issuable under the Company's 1998 Stock Option
Plan ("1998 Plan") by 1,600,000 shares, subject to stockholder approval. In
addition the Board of Directors also approved a proposal to grant 1,000,000
options under the 1998 Plan to various officers, directors and consultants and
400,000 options outside the 1998 Plan to a consultant. The estimated fair market
value of $450,000 for the consultant's option is based on the Black Scholes
value option pricing model.
Also on July 18, 1999, the Board of Directors of the Company approved a proposal
to reduce the exercise price of a consultant's option from $37.19 per share to
$6.75 per share for 112,500 shares. The market price of the Company's common
stock at the date of this action was $1.156 and the additional compensation
expense recognized under FASB 123 was minimal.
On July 26, 1999, the Company reached an agreement with the holder of the
remaining 215 shares of Series RR Preferred Stock to allow conversion into
130,788 shares of the Company's common stock in full and final settlement of the
215 Preferred RR Shares.
On July 26, 1999 the Company announced that it entered into a non-binding merger
agreement that provides for the formation of a holding company known as Fusion
Networks Holding, Inc. ("FNH") by the Company and the merger of Fusion Networks,
Inc. ("Fusion") a Florida based privately held corporation. As a result both the
Company and Fusion will become wholly owned subsidiaries of FNH. The
stockholders of Fusion will receive one share of common stock of FNH for each
share of Fusion's common stock held and the stockholders of the Company will
receive one share of FNH for each share of the Company's common stock held,
resulting in the current stockholders of Fusion owning approximately 89% of FNH
common stock. The proposed plan of merger is subject to a number of conditions
including, but not limited to, regulatory approvals and the receipt of
stockholder approval from both Fusion and the Company.
18. SUBSEQUENT EVENT - ACCOUNTS PAYABLE SETTLEMENTS
During the period from September 8 through January 11, 2000, the Company issued
157,943 shares of restricted common stock in settlement of $796,026 of accounts
payable and issued 62,000 shares of its common stock as collateral to their
surety in lieu of a $200,000 performance bond on the Oak Ridge, Tennessee
contract.
F-38
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
Unaudited
September 30, December 31,
ASSETS 1999 1998
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 130,284 $ 384,292
Accounts receivable 2,310,741 2,572,951
Notes receivable - current 141,198 367,198
Inventory - 582,517
Costs and estimated earnings in excess of billings 23,171 1,900,336
Recoverable income taxes 1,200,000 -
Prepaid expenses and other current assets 1,083,530 906,137
----------- ---------
Total Current Assets 4,888,924 6,713,431
Investments in and Advances to Unconsolidated Affiliates 1,275,211 2,454,521
Investment in Affiliate, at cost 1,853,125 1,853,125
Debt Discount and Issuance Costs - 16,124
Property, Plant and Equipment 2,362,743 3,133,404
Deposit in Lieu of Bond 200,000 -
Other Assets 979,925 979,925
----------- ---------
$ 11,559,928 $ 15,150,530
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $214,485 $ 622,794
Accounts payable and accrued expenses 7,497,248 6,578,070
Billings in excess of costs and estimated earnings 1,222,224 -
Due to Officers 248,686 -
----------- ---------
Total Current Liabilities 9,182,643 7,200,864
Long-Term Debt 23,881 64,544
----------- ---------
Total Liabilities 9,206,524 7,265,408
----------- ---------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 7,500,000 shares $.01 par value, issued
and outstanding 3,452,218 in 1999 and 2,947,298 in 1998 34,522 29,473
Additional paid-in capital 58,357,366 57,215,536
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value
Series RR, Issued and outstanding 215 shares in 1998,
stated at a conversion value of $1,000 per share - 215,000
Retained earnings (deficit) (56,038,454) (49,574,887)
----------- ---------
2,353,404 7,885,122
----------- ---------
$ 11,559,928 $ 15,150,530
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-39
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Nine Months Ended September 30,
1999 1998
------ ------
<S> <C> <C>
Revenue:
Contract income $7,556,608 $14,547,358
----------- ----------
7,556,608 14,547,358
Cost of Sales:
Direct job costs 9,008,924 15,843,676
Write-down of inventory surplus 582,517 -
----------- ----------
9,591,441 15,843,676
Gross Profit (Loss) (2,034,833) (1,296,318)
----------- ----------
Operating Expenses:
General and administrative expenses 5,236,925 8,774,586
Depreciation and amortization 268,098 483,328
Equity in net loss of unconsolidated affiliates 35,854 -
----------- ----------
5,540,877 9,257,914
----------- ----------
Loss from Operations (7,575,710) (10,554,232)
Other Income (Expense):
Interest income (expense) (76,568) ( 4,418,305)
----------- ----------
Loss before Provision (Credit) for Income Taxes (7,652,278) (14,972,537)
Provision (Credit) for Income Taxes (1,200,000) (400,000)
----------- ----------
Net Loss ( 6,452,278) (14,572,537)
Preferred Stock Dividends including amortization of beneficial
conversion feature of $ 0 in 1999 and $ 3,630,000 in 1998. 11,289 3,798,966
----------- ----------
Net Loss on Common Stock $(6,463,567) $(18,371,503)
=========== ===========
Loss per Share:
Basic Loss per share $ (2.07) $ (10.32)
=========== ===========
Diluted Loss per share $ (2.07) $ (10.32)
=========== ===========
Basic common shares outstanding 3,120,383 1,780,221
=========== ===========
Diluted common shares outstanding 3,120,383 1,780,221
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-40
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Three Months Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Contract income $ 2,980,792 $4,531,809
----------- ----------
2,980,792 4,531,809
----------- ----------
Cost of Sales:
Direct job costs 3,867,164 4,349,328
Write-down of inventory surplus 582,517 -
----------- ----------
4,449,681 4,349,328
----------- ----------
Gross Profit (Loss) (1,468,889) 182,481
----------- ----------
Operating Expenses:
General and administrative expenses 1,681,017 2,393,864
Depreciation and amortization 40,659 165,082
Equity in net loss of unconsolidated affiliates 27,143 -
----------- ----------
1,748,819 2,558,946
----------- ----------
Loss from Operations (3,217,708) (2,376,465)
Other Income (Expense):
Interest income (expense) (31,395) (95,621)
----------- ----------
Loss before Credit for Income Taxes (3,249,103) ( 2,472,086)
Credit for Income Taxes ( 1,200,000) -
----------- ----------
Net Loss (2,049,103) (2,472,086)
Preferred Stock Dividends including amortization of beneficial
conversion feature of $ 0 in 1999 and $300,000 in 1998. 3,763 351,923
----------- ----------
Net Loss on Common Stock $(2,052,866) $(2,824,009)
=========== ===========
Loss per Share:
Basic Loss per share $ (.62) $ (1.48)
=========== ===========
Diluted Loss per share $ (.62) $ (1.48)
=========== ===========
Basic common shares outstanding 3,288,689 1,913,213
=========== ===========
Diluted common shares outstanding 3,288,689 1,913,213
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-41
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the Nine Months Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss on Common Stock $(6,463,567) $(18,371,503)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes - (400,000)
Depreciation and amortization 372,310 479,656
Amortization of debt discount and beneficial conversion feature 16,124 7,987,013
Amortization of beneficial conversion feature on issuance
of restricted common stock 109,380 -
Dividend on convertible preferred stock 11,289 168,966
Compensation cost of consultant stock options - 1,871,400
Equity in net loss of unconsolidated affiliates 35,854 -
Decrease (Increase) In:
Accounts receivable 262,210 101,470
Notes receivable 226,000 7,652
Inventory 582,517 -
Costs and estimated earnings in excess of billings 1,877,165 (249,579)
Prepaid expenses and other current assets (177,393) 308,728
Bonding deposits - 9,157
Recoverable income taxes (1,200,000) -
Increase (Decrease) In:
Accounts payable and accrued expenses 1,091,286 1,404,361
Billings in excess of costs and estimated earnings 1,222,224 4,903
----------- ----------
Net cash used in operating activities (2,034,601) (6,677,776)
----------- ----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (1,944) (472,328)
Proceeds from disposal of property, plant and equipment 400,295 -
Investment in and advances from (to) unconsolidated affiliates 1,143,456 946,076
Acquisition of other assets - (78,125)
Loans and advances from (to) officers 248,686 (112,331)
----------- ----------
Net cash provided by (used in) in investing activities 1,790,493 183,292
----------- ----------
Cash Flows from Financing Activities:
Net proceeds from convertible preferred stock issuance - 4,590,000
Long term debt borrowing - 156,238
Short term borrowing 400,000 -
Principal payments on long-term debt (444,464) (488,912)
Proceeds from exercise of stock options and warrants 34,564 2,119,535
----------- ----------
Net cash (used in) provided by financing activities (9,900) 6,376,861
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (254,008) (117,623)
Cash and Cash Equivalents, beginning of period 384,292 602,242
----------- ----------
Cash and Cash Equivalents, end of period $130,284 $484,619
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-42
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
For the Nine Months Ended September 30,
1999 1998
------- -------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 64,321 $ 249,648
========= =========
Income taxes $ - $ -
========= =========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Repayment of stockholder's loan through issuance of common stock $265,122 $ -
========= =========
Conversion of convertible promissory notes to common stock $ - $3,025,000
========= =========
Conversion of preferred stock to common stock $215,000 $5,496,000
========= =========
Beneficial conversion feature of convertible preferred stock $ - $3,830,000
========= =========
Beneficial conversion feature of issuance of restricted common stock $109,380 $ -
========= =========
Issuance of restricted common stock for a deposit in lieu of bond $200,000 $ -
========= =========
Issuance of restricted common stock for debt $322,784 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-43
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of IDM Environmental Corp. and all of it's wholly owned and
majority owned subsidiary companies. The December 31, 1998 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 1998. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending December 31, 1999.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued wilful citations and notification of
penalty in the aggregate amount of $147,000 on the Company in connection
with the accidental death of an employee of one of the Company's
subcontractors on the United Illuminating Steel Point Project job site in
Bridgeport, Connecticut. A complaint was filed against the Company by the
Secretary of Labor, United States Department of Labor on September 30,
1996. A hearing was conducted in the matter in April, 1997. In June 1998,
the Company received a copy of the written decision filed by OSHA's Review
Commission. The Commission vacated the first alleged wilful citation, but
affirmed each of the second and third wilful citations, imposing a penalty
in the amount of $70,000 for each citation. The Company strongly objects to
the Commission's finding on the basis that it cannot be sustained as
matters of fact or law and has filed a timely Notice of Appeal with the
OSHA Review Commission for Discretionary Review, which body has accepted
jurisdiction of the matter on administrative appeal. The Company is
contesting the Citations and Notification of Penalty.
Also in connection with this accidental death, the employee's estate filed
a complaint for wrongful death against the subcontractor and the Company on
February 11, 1997. The estate seeks damages in the amount of $45 million.
The Company is being defended by the subcontractor's insurance carrier
pursuant to the subcontractor's obligation to defend and indemnify the
Company with respect to the actions of its (subcontractor's) employees and
agents. The Company will be fully indemnified for any liability, if any,
for any potential judgement or settlement in this matter and, therefore,
the action is not expected to have any material effect on the Company's
consolidated financial statement.
In July of 1998, the Company, it's subsidiary, Global Waste & Energy and certain
affiliates and officers were named as co-defendants in a cause of action styled
Kasterka Vrtriebs GmbH v. IDM Environmental Corp., et al, filed in the Court of
Queen's Bench of Alberta, Judicial District of Calgary. The plaintiff, Kasterka,
has alleged that the Company and it's affiliates breached a marketing agreement
that had been entered between Kasterka and Enviropower. The plaintiff has
alleged that the defendants failed to supply the required plans and
specifications relating to the gasification technology originally developed by
Enviropower and that, as a result, Kasterka was unable to manufacture and market
gasification units in the territories designated in the marketing agreement.
Kasterka has asserted a variety of claims for damages in the aggregate amount of
approximately $42 million. The Company believes the suit is without merit and
intends to vigorously contest the cause of action.
In September of 1998, the Company was named as a defendant in a cause of action
styled Balerna Concrete Corporation, et al. v. IDM Environmental Corp., et al,
filed in the United States District Court of Massachusetts (Case No.
98CV11883ML). The plaintiffs alleged that the Company, and others, engaged in a
pattern of illegal
F-44
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. CONTINGENCIES (Continued)
conduct to divert funds from the plaintiffs through the operation of a concrete
finishing business. The plaintiffs have asserted various claims under RICO,
common law fraud, conversion, breach of contract and others basis seeking
damages in an amount expected to exceed $450,000. The Company believes the suit
is without merit and intends to vigorously contest the cause of action.
3. CONVERTIBLE PREFERRED STOCK SERIES RR
On August 11, 1998, the Company sold 1,500 shares of Series RR 6% Convertible
Preferred Stock. The securities were issued to one accredited investor. The
aggregate sales price of such securities was $1,500,000. Commissions totaling
10% were paid in connection with the placement. The securities were offered
pursuant to Regulation D. The offer was directed exclusively to a single
accredited investor without general solicitation or advertising and based on
representations from the investor that such investor was acquiring for
investment.
The Series RR Preferred Shares are convertible into Common Stock at the lesser
of (i) $22.50 per share or (ii) 75% of the average closing bid price of the
Common Stock during the five trading days prior to conversion. The Preferred
Shares pay an annual dividend of 6% payable semi-annually or on conversion or at
redemption in cash or Common Stock, at the Company's option. During the year
ended December 31, 1998, 1,285 shares of Series RR Preferred Stock were
converted into 359,981 shares of the Company's common stock. Subsequent to
December 31, 1998, demand for conversion or redemption of the remaining 215
shares of Series RR Preferred Stock had been submitted. At the annual
shareholders meeting, on June 10, 1999, the shareholders approved a proposal to
authorize issuance of common shares in excess of 360,000 on the conversion of
outstanding Series RR Preferred Stock. On July 26, 1999, The Company reached
agreement with the holder of the remaining 215 shares of Series RR Preferred
Stock to allow conversion into 130,788 common shares in full and final
settlement of the 215 Preferred RR Shares.
4. EARNINGS PER SHARE
The Company is calculating earnings per share to comply with the SEC staff
position on accounting for securities issued with beneficial conversion
features. This accounting requires that the Company reflect the difference
between the market price of the Company's common stock and the applicable
conversion rate on the convertible preferred stock (note payable) as a dividend
(interest expense) at the issue date and amortize from the issue date of the
convertible security. Earnings per share as reported for the period ended
September 30, 1998 reflect the following:
- -- The beneficial conversion feature of the Company's Series C Preferred Stock
and related warrants was $3,330,000 and was amortized as a dividend from
February 13, 1998, the issue date, to June 22, 1998, the date the
Registration Statement of the underlying stock was declared effective.
$104,000 was recorded for the three months ended March 31, 1998, and
$3,226,000 for the three months ended June 30, 1998.
- -- The beneficial conversion feature of the series RR preferred stock was
$500,000 and is being amortized as a dividend from the issue date August
11, 1998, to November 12, 1998, the date the Registration Statement of the
underlying stock was declared effective. $300,000 was recorded for the
three months ended September 30, 1998.
F-45
<PAGE>
5. PLAN OF REORGANIZATION AND MERGER -- FUSION NETWORKS, INC.
On August 18, 1999, the Company entered into a Plan of Reorganization and
Merger and an Agreement and Plan of Merger (collectively, the "Plan of
Reorganization") with Fusion Networks, Inc. ("Fusion Networks"). Pursuant
to the terms of the Plan of Reorganization, the Company will form a new
holding company (the "Holding Company"). The Company will merge with a
wholly-owned subsidiary of the Holding Company with the shareholders of the
Company receiving one share of common stock of the Holding Company for each
share of common stock of the Company held immediately prior to the
reorganization. Fusion Networks will merge into another wholly-owned
subsidiary of the Holding Company with the shareholders of Fusion Networks
receiving one share of common stock of the Holding Company for each share
of common stock of Fusion Networks held immediately prior to the
reorganization. Following the reorganization, the shareholders of the
Company are expected to own approximately 11% of the common stock of the
Holding Company with the shareholders of Fusion Networks owning
approximately 89% of the common stock of the Holding Company.
Fusion Networks is a newly formed company, based in Miami, Florida, which
is in the process of building a portal-type web site with an initial
emphasis on Latin America and the Hispanic market in the United States.
Fusion Networks launched its initial site, on a pilot basis, in Bogota,
Colombia, in October, 1999.
The proposed reorganization is subject to a number of conditions, including
approval by the shareholders of both the Company and Fusion Networks,
receipt by the Company's board of directors of a "fairness opinion" from an
investment banking firm, the receipt of all necessary regulatory approvals
and the negotiation and execution of definitive documentation. There can be
no assurance that the reorganization will be successfully implemented or
that there will not be modifications to the terms of the reorganization.
6. STOCKHOLDERS' EQUITY
Reverse Stock Split
On March 11, 1999, the Company's Board of Directors authorized a 1 for 10
reverse stock split of its common stock effective April 16, 1999 for
shareholders of record at the close of business on April 16, 1999 and
amended the par value of the common stock to $.01. All shares and per-share
amounts in the accompanying consolidated financial statements have been
restated to give effect to the 1 for 10 reverse stock split.
Reverse Split and Extension of Class A Warrants
In April 1999, the Company's Board of Directors authorized a 1 for 10
reverse split of the Company's outstanding Class A Warrants effective April
16, 1999 and extended the term of those warrants to April 2000.
Loans by Warrant Holders
During November, 1998, the holders of certain $30.00 Warrants, Lock-Up
Warrants and Reload Warrants loaned $671,023 to the Company. The loans may
be credited against the exercise price of those Warrants. As of December
31, 1998, $265,122 was still outstanding. During March, 1999, 97,525 of the
$30.00 warrants were converted into 97,525 shares of common stock. The
exercise price of the warrants paid in full the loan outstanding.
F-46
<PAGE>
6. STOCKHOLDERS' EQUITY (Continued)
Issuance of Stock for Services and In Lieu of Bond
--------------------------------------------------
During the three months ended September 30, 1999, the Company issued 79,133
shares of common stock to certain vendors in settlement of amounts owed to
those vendors totaling $322,784. Additionally, the Company issued 62,000
shares of common stock as a deposit in lieu of a bond in the amount of
$200,000.
Stock Options
-------------
The exercise price of a consultant's option for 112,500 shares was reduced
from $37.19 per share to $6.75 per share for 112,500 shares. The market
price of The Company's Common Stock at the date of this action was $1.156.
In conjunction with the proposed Fusion Networks transaction, the board of
directors approved an amendment' to the Company's 1998 Stock Option Plan
("1998 Plan") increasing the shares reserved for issuance by 1,600,000
shares. The amendment to the 1998 Plan is subject to shareholder approval.
In conjunction with the proposed Fusion Networks transaction and the
amendment of the 1998 Plan, the board of directors approved grants of a
total of 1,000,000 stock options at $1.156 per share vesting 10% in 90 days
and 90% in 150 days. Of the options granted, 400,000 were granted to each
of the Company's Chairman and Chief Operating Officer and the Company's
President and Chief Executive Officer.
In conjunction with the proposed Fusion Networks transaction, the board of
directors approved the grant of 400,000 options at $1.156 per share to a
consultant. This option is not under any of the Company's stock option
plans.
7. INVENTORY
As a result of continued delays in the commencement of active energy
projects on which the Company planned to deploy its generator inventory,
coupled with continued losses and limited resources to pursue those
projects, during the quarter ended September 30, 1999, the Company wrote
down the balance of its generator inventory in the amount of $582,517.
8. RECOVERABLE INCOME TAXES
The Company has been notified by the New Jersey Economic Development
Authority that its application to participate in the Technology Certificate
Transfer Program was approved. As a result, during the quarter ended
September 30, 1999, the Company recorded a $1,200,000 tax benefit relating
to its New Jersey net operating losses ("NOL").
9. SUBSEQUENT EVENTS
During the period from October 1 through January 11, 2000, the Company
issued 78,810 shares of restricted common stock in settlement of accounts
payable totaling $473,242.
F-47
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Fusion Networks, Inc.
Miami, Florida 33122
We have audited the accompanying balance sheet of Fusion Networks, Inc. (A
Development Stage Company) as of September 30, 1999 and the related statements
of operations, stockholders= equity and cash flows for the period from inception
(July 1, 1999) to September 30, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fusion Networks, Inc. (A
Development Stage Company) as of September 30, 1999 and the results of its
operations and its cash flows for the initial period then ended in conformity
with generally accepted accounting principles.
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
December 10, 1999
January 24, 2000 as to Note 7
F-48
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 2,711,860
---------
Total Currents Assets 2,711,860
Property and Equipment 308,659
Deposits on Equipment 134,353
---------
Total Assets $3,154,872
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 204,609
----------
Total Current Liabilities 204,609
Stockholders' Equity:
Common Stock, authorized 60,000,000 shares $.00001 par
value, issued and outstanding 27,450,136 274
Additional paid-in-capital 3,359,227
Deficit accumulated during the development stage (409,238)
---------
Total Stockholders' Equity 2,950,263
---------
Total Liabilities and Stockholders' Equity $3,154,872
=========
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1999) TO SEPTEMBER 30, 1999
Revenues $ -
----------
Costs and Expenses:
General and administrative expenses 39,111
Product development and engineering 310,931
Sales and marketing 17,655
Merger expenses 46,000
----------
Total Costs and Expenses 413,697
Other Income:
Interest income 4,459
Net Loss $(409,238)
==========
Loss per Share:
Basic loss per share $(0.01)
==========
Diluted loss per share $(0.01)
==========
Basic common shares outstanding 27,450,136
==========
Diluted common shares outstanding 27,450,136
==========
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS= EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 1, 1999) TO SEPTEMBER 30, 1999
<TABLE>
Deficit
Common Stock Accumulated
$.00001 Par Value Additional During the Total
Number of Paid-In- Development Stockholders'
Shares Amount Capital Stage Equity
---------- --------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
At Inception on July 1, 1999 $ - $ - $ - $ -
Issuance of Common Stock 26,600,000 266 1,000,484 1,000,750
Issuance of Shares and Warrants
in Connection with Private
Placement 850,136 8 2,358,743 2,358,751
Net Loss for the Period from
Inception (July 1, 1999) to
September 30, 1999 (409,238) (409,238)
----------- --------- ---------- ------------ ------------
27,450,136 $ 274 $3,359,227 $(409,238) $2,950,263
=========== ========= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1999) TO SEPTEMBER 30, 1999
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss $(409,238)
Adjustment to reconcile net loss to net cash
used in operating activities:
Increase in accounts payable and accrued expenses 204,609
----------
Total adjustments to net loss 204,609
----------
Net cash used in operating activities (204,629)
-----------
Cash Flows from Investing Activities:
Purchase of property and equipment (308,659)
Deposits on equipment (134,353)
----------
Net cash used in investing activities (443,012)
----------
Cash Flows from Financing Activities:
Net proceeds in connection with the issuance of common stock and warrants 3,359,501
---------
Net cash provided by financing activities 3,359,501
----------
Net Increase in Cash and Cash Equivalents 2,711,860
Cash and Cash Equivalents - Inception (July 1, 1999) -
Cash and Cash Equivalents - End of Period (September 30, 1999) $2,711,860
==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ -
============
Taxes $ -
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
- ------------------
Fusion Networks, Inc., (the ACompany@) a development stage company, was
incorporated under the laws of the State of Delaware on June 30, 1999. The
Company is a start-up Internet company founded to provide improved Internet
content and services to Latin American markets and to the Spanish and Portugese
speaking population around the world through their Internet Web Site
LatinFusion.com.
On September 23, 1999 the Company formed a wholly owned Colombian subsidiary,
Fusion Networks DE Colombia LTDA for the purpose of conducting the Company's
business in Colombia, South America.
Basis of Accounting
- -------------------
The financial statements of the Company have been prepared on the accrual basis
of accounting.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
Use of Management=s 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 as of the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Property and Equipment
- ----------------------
Property and equipment are being depreciated for financial accounting purposes
on the straight-line method over their respective estimated useful lives. Upon
retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
or losses are reflected in the results of operations. Expenditures for
maintenance and repairs are charged to operations. Renewals and betterments are
capitalized. Depreciation of leased equipment under capital leases is included
in depreciation.
Impairment of Long-Lived Assets
- -------------------------------
The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS
121), AAccounting 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.
F-53
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
- -------------------
The Company=s revenues will be derived principally from the sale of
Ainfomercials@ which are full multimedia advertisements including animated
graphics, sound and voice. Additional revenues will be derived from corporate
sponsorships of various services and games provided on LatinFusion.com as well
as from e-commerce commissions and transaction fees.
Product Development
- -------------------
Costs incurred in conjunction with the development of new products are charged
to expense as incurred. Material software development costs subsequent to the
establishment of technological feasibility will be capitalized. Based upon the
Company=s product development process, technological feasibility is established
upon the completion of a working model.
Comprehensive Income
- --------------------
The Company adopted Statement of Financial Accounting Standards No. 130, (SFAS
130) AReporting Comprehensive Income@. This statement establishes rules for the
reporting of comprehensive income and its components which require that certain
items such as foreign currency translation 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 impact on total stockholders= equity for
the period presented in these financial statements.
Earnings (Loss) Per Share
- -------------------------
The Company calculates earnings per share in accordance with SFAS No. 128,
AComputation of Earnings Per Share@ and SEC Staff Accounting Bulletin No. 98.
Accordingly, basic earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the incremental common shares
issuable upon the conversion of the Preferred Stock (using the if-converted
method) and shares issuable upon the exercise of stock options (using the
treasury stock method); common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
Stock Splits
- ------------
On August 23, 1999, the Company=s Board of Directors authorized a 1000 for 1
forward stock split of its common stock and amended the par value of the common
stock to $0.00001 and increased the authorized shares to 3,000,000 for
shareholders of record at the close of business on August 23, 1999. All share
and per-share amounts in the accompanying financial statements have been
restated to give effect to the 1000 for 1 forward stock split.
On November 16, 1999, the Company=s Board of Directors authorized a 17.7333333
for 1 stock split of its common stock effective November 18, 1999 for
shareholders of record at the close of business on November 18, 1999. All share
and per- share amounts in the accompanying consolidated financial statements
have been restated to give effect to the 17.7333333 for 1 stock split.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains the majority of its cash and cash equivalents with one
financial institution and this creates an inherent concentration of credit risk.
F-54
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Start-Up Activities
- -------------------
The American Institute of Certified Public Accountants recently issued Statement
of Position (ASOP@) 98-5, AReporting the Costs of Start-Up Activities.@ SOP 98-5
requires start-up costs, as defined, to be expensed as incurred and is effective
for financial statements for fiscal years beginning after December 15, 1998. The
Company expenses all start-up costs as incurred in accordance with SOP 98-5 will
have no material impact on the Company=s financial statements.
Income Taxes
- ------------
The Company follows Statement of Financial Accounting Standards No. 109, (SFAS
109) AAccounting for Income Taxes@. SFAS 109 requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
2. PLAN OF OPERATIONS
Fusion Networks, Inc. is a development stage company in the process of
developing LatinFusion.com, a universal portal offering a comprehensive suite of
Internet products, services and solutions to Latin America and other Spanish and
Portugese speaking markets. The Company believes that by offering an integrated
platform of content, community and commerce and related services, all produced
locally and in Spanish or Portugese, with the specific needs and desires of the
Spanish and Portugese speaking population as its focus, LatinFusion.com will be
well positioned to capitalize on the anticipated growth of the Internet
throughout the Spanish and Portugese speaking world.
In order to capitalize on the anticipated growth of the Internet throughout the
Spanish and Portugese speaking population, the Company intends to establish
credibility in the Spanish and Portugese speaking markets by establishing a
local presence in those markets and developing content tailored to those
markets. The Spanish and Portugese speaking populations of the world share
important cultural and linguistic characteristics. To succeed in serving the
Internet needs of these communities the Company believes it is critical to
establish itself as a part of that community and display a sensitivity to the
needs of that community. While existing Internet providers produce native
language content for the Spanish and Portugese speaking community, the majority
of their content is translations of English language content.
The Company believes that in order to create loyalty and a sense of community
among Spanish and Portugese speaking Internet users, a Web site must contain
content which is both locally produced and produced in Spanish and/or Portugese.
The Company intends to establish and grow the LatinFusion.com site from a local
base in key markets to larger regional presences. To begin this process, the
Company will establish an initial presence in the Bogota, Colombia market to
support its initial pilot operations. The Company will establish the
infrastructure and local content development and support teams to ensure that
the LatinFusion.com site develops a reputation for quality, responsiveness and
reliability of both the Web site and related services.
F-55
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
2. PLAN OF OPERATIONS (Continued)
All content will be developed locally and will be multi-cultural as well as
multilingual (available in Spanish, Portugese and English). By locally producing
native language content with reliable services, the Company believes
LatinFusion.com will become a recognized name and preferred Web site for
Internet users in the Bogota market. The Company also feels that by establishing
a favorable reputation in Bogota, the LatinFusion.com site will quickly gain
recognition and a favorable reputation in the surrounding region. The Company
plans to repeat this process in other key markets throughout Latin America as
well as in certain key markets in the United States and Europe.
In addition to establishing credibility and local presence in the Spanish and
Portugese markets, the Company plans to offer a comprehensive range of Internet
products and services tailored to those markets. The LatinFusion.com site is
expected to be initially divided into seven channels, each offering a broad
array of related products and services. The channels will include (1) home,
where users can access time, weather, and currency data, search engines and a
help desk; (2) media, which will provide access to national, regional and local
newspapers, regional magazines and regional television and radio broadcasts; (3)
guides, where users can access community, entertainment and tourist information
for selected regions and cities; (4) commerce, providing access to a wide
variety of on-line shopping options, on-line banking and on-line investment
options; (5) games, where users can access interactive games, (6) connection,
providing users with access to e-mail, video chat, Internet telephone services
and other communication tools, and (7) contests, where users can participate in
various contests. The Company plans to monitor new products and services as well
as user demand for those products and services and will add such to assure that
users have the broadest range of Internet products and services available.
The Company also plans to utilize state-of-the-art technologies to improve their
users Internet experience. The Company intends to continually adopt the latest
technologies to both overcome bandwidth limitations and provide the richest,
most entertaining multimedia experience available on the Internet.
LatinFusion.com has been designed using Macromedia=s Flash 4.0 which will offer
streaming video, interactive on-screen graphics and full stereo sound throughout
the site. The Company believes that the adoption of this technology will
differentiate LatinFusion.com from many of the sites on the Internet and make it
an exciting and enjoyable Web site to visit. The Company plans to consistently
monitor new technologies and will adopt new technologies to assure that
LationFusion.com offers the richest and most attractive Internet experience
available.
Utilizing state-of-the-art technology also allows the Company to deploy
innovative new advertising strategies to better serve both users and
advertisers. Presently, advertising on the Internet today consists principally
of banners placed on Web sites which are linked to an advertiser=s Web site. The
Company has adopted a new, non-banner, advertising model which it believes will
be better received by both Web users and advertisers. Utilizing Macromedia Flash
4.0, the Company will produce Ainfomercials@ which are ten seconds or less in
length and will include full multimedia, including graphics, sound and voice.
These infomercials will be downloaded in the background and run between page
views, and will be customized and targeted based on the user demographics
associated with the Web page being viewed. The Company believes this type of
advertising is similar to highly targeted television advertising, which is a
proven and long standing means of advertising, and will produce superior results
to traditional banner advertising.
3. PROPERTY AND EQUIPMENT
At September 30, 1999 property and equipment consist of various office equipment
and computers, at a total cost of $308,659, with estimated useful lives of 5
years. At September 30, 1999, the equipment had not yet been placed in service
and therefore no depreciation has been provided for in these financial
statements.
F-56
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
4. RELATED PARTIES
The Company currently leases approximately 1,600 square feet of office space in
an office building in Miami, Florida, from Latam Holding, Inc., a Florida
corporation, whose principle owner is Enrique Bahamon, a stockholder and Chief
Financial Officer of the Company. The lease is for a term of one year which
commenced on July 1, 1999 and calls for a monthly base rent of $2,500. The
related expense for this lease for the period ended September 30, 1999 was
$6,855. As of September 30, 1999, the Company was current on all rental
obligations due the related party.
During 1999, the Company entered into an agreement with Red Colombia, a company
domiciled in Bogota, Colombia, owned in part by Hernando Bahamon and Felipe
Santos, principal stockholders, officers and/or directors of the Company, under
which Red Colombia agreed to provide certain Web site development services, at a
total contracted service fee of $182,559, for the period from July 28, 1999
through October 31, 1999. During July and September 1999, the Company paid Red
Colombia $121,706 of this service fee, which was expensed for the period ended
September 30, 1999.
Also during 1999, the Company purchased computer and office equipment from Latam
Compuser Corp., a Miami, Florida based company owned by Enrique Bahamon, a
stockholder and Chief Financial Officer of the Company. These purchases have
been capitalized by the Company and amounted to approximately $36,000.
5. COMMITMENTS AND CONTINGENCIES
Merger Agreement
- ----------------
On July 26, 1999 the Company announced that it entered into a non-binding merger
agreement with IDM Environmental Corp. (collectively with it=s subsidiaries
referred to herein as AIDM@) a New Jersey based publicly traded corporation,
pursuant to which IDM agreed to form a holding company known as Fusion Networks
Holding, Inc. (AFNH@) with both the Company and IDM merging with subsidiaries of
FNH. On August 18, 1999 the agreement was amended and became a definitive
agreement. As a result both the Company and IDM will become wholly owned
subsidiaries of FNH.
The stockholders of the Company will receive one share of common stock of FNH
for each share of the Company=s common stock held and the stockholders of IDM
will receive one share of FNH for each share of IDM common stock held, resulting
in the current stockholders of the Company owning approximately 89% of FNH
common stock. The proposed plan of merger is subject to a number of conditions
including, but not limited to, regulatory approvals and the receipt of
stockholder approval from both the Company and IDM.
Employment Agreement
- --------------------
In September 1999, Hernando Bahamon, President, CEO and Chairman of the Board of
Directors of the Company, entered into a Service Agreement with the Company
pursuant to which Mr. Bahamon agreed to provide services to the Company in
connection with the launch of its Bogota, Colombia Web site. The agreement
provides for monthly compensation of $15,000 and runs for a term of six months
from July 1, 1999 subject to automatic renewal on a monthly basis thereafter. It
is anticipated that Mr. Bahamon will enter into a long-term employment agreement
with the Company following the merger.
F-57
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
5. COMMITMENTS AND CONTINGENCIES (Continued)
Year 2000
- ---------
The Company has contacted, and in the future intends to contact, their
third-party vendors, licensors and providers of software, hardware and services
regarding their Year 2000 readiness. Because LatinFusion.com is a new network
and the Company intends to utilize new equipment and software which is Year 2000
compliant, they believe that their network will perform correctly through Year
2000 and beyond. Due to the highly dynamic nature of their business, however,
they will continue the testing process through Year 2000 and beyond and will
continue to confirm that their third-party vendors, licensors and providers are
Year 2000 ready.
Foreign Operations
- ------------------
The Company will be relying heavily on foreign Internet markets, primarily in
Latin America, for its operations. The market for Internet services in Latin
America is in an early stage of development and is an unproven medium for
advertising and other commercial services. In addition, there are several
factors involved in increasing the use of the Internet in Latin America for
commercial purposes which include security, reliability, cost, ease of
development, administration and quality of service. In addition, the
telecommunications structure in Latin America is not as well developed as in the
United States or Europe. Access to the Internet requires a relatively advanced
telecommunications infrastructure and continued development of the
telecommunications infrastructure will have a substantial impact on the
Company=s ability to deliver services and on the market acceptance of the
Internet in Latin America in general. Social, political and economic conditions
in Latin America could also have an effect on the Company=s operations. The
volatility of these conditions could make it difficult for the Company to
sustain their expected growth in revenues and earnings, which could have an
adverse effect on their stock price. Currency exchange rates have also been
somewhat volatile throughout Latin America and the economies of these areas have
experienced significant economic downturns. Poor economic conditions in Latin
American countries may cause the Company=s customers to reduce their advertising
spending, which could have an adverse effect on the Company.
6. STOCKHOLDERS' EQUITY
Common Stock
- ------------
The holders of Common Stock have no preemptive rights and the Common Stock has
no redemption, sinking fund or conversion provisions. Each share of Common Stock
is entitled to one vote on any matter submitted to the holders and to equal
rights in the assets of the Company upon liquidation. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
On August 23, 1999, the Company=s Board of Directors authorized a 1000 for 1
forward stock split of its common stock and amended the par value of the common
stock to $0.00001 and increased the authorized shares to 3,000,000 for
shareholders of record at the close of business on August 23, 1999. All share
and per-share amounts in the accompanying financial statements have been
restated to give effect to the 1000 for 1 forward stock split.
On November 16, 1999, the Company's Board of Directors authorized a 17.7333333
for 1 forward stock split of its common stock and increased the authorized
shares to 60,000,000 for shareholders of record at the close of business on
November 18, 1999. All share and per-share amounts in the accompanying
consolidated financial statements have been restated to give effect to the
17.7333333 for 1 forward stock split.
F-58
<PAGE>
FUSION NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Continued)
6. STOCKHOLDERS' EQUITY (Continued)
Common Stock (continued)
- -----------
The original incorporators of the Company were issued a total of 13,3000,000
shares of the Company=s common stock for a nominal cash consideration of $750.
On July 8, 1999, the Company entered into an agreement with certain investors
for the purchase of 4,433,333 shares of the Company=s common stock for $500,000
and options to purchase an additional 8,866,667 shares of the Company=s common
stock, at any time before December 31, 1999, for an additional $500,000. As of
September 30, 1999, the investors had exercised their options resulting in a
total of 13,300,000 shares of common stock being issued and $1,000,000 in funds
being received by the Company under this agreement.
During August, 1999 the Company initiated a private placement offering under
which the Company is offering units (the AUnits@) for sale at $60,000 per Unit.
Each Unit consists of 20,000 shares of common stock and 20,000 three year
warrants (the AWarrants@) to purchase common stock at $6.00 per share for a
period of three years. In addition, licensed broker- dealers participating in
the private placement will receive commissions of $4,500 cash and 1,500 three
year warrants (the ABrokers Warrants@) to purchase common stock at $6.00 per
share for a period of three years, for each unit sold. As of September 30, 1999
the Company had issued 850,136 shares of common stock, 850,136 common stock
Warrants and 63,760 Brokers Warrants, for net proceeds of $2,358,750.
Stock Options
- -------------
During October, 1999, the Company's Board of Directors approved a stock option
plan for the Company, the Fusion Networks, Inc. 1999 Stock Option Plan (the
A1999 Plan@), under which stock option awards may be made to eligible key
employees, consultants and directors of the Company. The 1999 Plan became
effective immediately and it will remain in effect until the tenth anniversary
of the effective date unless terminated earlier by the Board of Directors.
Pursuant to the plan, the Company will reserve 5,320,000 shares of common stock
for issuance pursuant to the grant of incentive stock options and non-qualified
stock options. Should the plan not be approved by the shareholders of the
Company within twelve months of the date of Board adoption, this plan shall
terminate and all options previously granted under this plan will become void
and of no effect.
7. SUBSEQUENT EVENTS
During November 1999, the Company completed the private placement discussed in
Note 6 and issued an additional 2,163,264 shares of common stock, 2,163,264
Warrants and 162,245 Brokers Warrants in conjunction with the private placement.
The net proceeds of these transactions were an additional $6,003,250 to the
Company.
On October 13, 1999 the Company completed launched LatinFusion.com, the
Company's pilot Web site from which it plans to launch additional sites in Latin
America, Spain and Portugal. The company launched its second site from Miami,
Florida on December 31, 1999.
On November 18, 1999 the Company issued a total of 2,500,000 warrants to various
consultants. The warrants are exercisable for three (3) years at $5.00 per
share. In connection with this transaction the Company will record in the fourth
quarter of 1999 consulting expenses of $14 million which was estimated using the
Black Scholes value option pricing model.
On October 12, 1999 the Company granted stock options to purchase 725,000 shares
of its common stock to 10 employees under the Company's 1999 Stock Option Plan.
In addition, the Company also granted under this plan stock options to 100,000
shares of its common stock to 10 consultants in Colombia, South America who
assisted in the development of the web-site. These options were all granted with
an exercise price of $5.34, the fair market value of the underlying common stock
at the date of grant. The Company will record approximately $84,000 as
consulting expense for the value of the 100,000 options issued to the 10
consultants. The value was computed using the Black Scholes value option pricing
model.
On December 29, 1999 the Company issued to a consultant a warrant to purchase
500,000 shares of the Company's common stock for services provided during the
fourth quarter of 1999 for financing, merger and acquisition and strategic
alliance consulting activities. The warrant is exercisable immediately, in whole
or in part, for a period of three years and at an exercise price of $5.00 per
common share. The Company will record approximately $5,600,000 as consulting
expense during the fourth quarter of 1999 in connection with this transaction.
On December 20, 1999, Fusion Networks and Marketing Services Group, Inc.
("MSGI") entered into a Stock Purchase and Sale Agreement pursuant to which
Fusion Networks issued 3,500,000 shares of common stock to MSGI in exchange for
1,500,000 shares of common stock of MSGI. MSGI is traded on the NASDAQ National
Market and has approximately 26 million shares outstanding and had a market
price of approximately $17 per share at the time of the agreement. MSGI provides
direct and database marketing, telemarketing and telefundraising, media planning
and buying, online consulting and common, automated internet marketing and web
design services. Pursuant to the terms of that agreement MSGI has the right for
a six month period ending in June 2000 to acquire up to an additional 3,500,000
shares of common stock of Fusion Networks in exchange for an additional
1,500,000 shares of MSGI common stock and MSGI has the right to designate a
nominee for director of Fusion Networks for a period of one year. MSGI and
Fusion Networks each agreed to "lock-up" the shares received from the other
preventing resale of these shares for a period of one year ending December 2000.
Additionally, the agreement provides that MSGI may rescind the transaction and
put the shares back to Fusion Networks if the merger with FNHI is not completed
by June 30, 2000.
In conjunction with the Stock Purchase and Sale Agreement, Fusion Networks
retained the services of WiredEmpire, MSGI's database marketing and
infrastructure subsidiary, to provide e-relationship tools and solutions to
accelerate deployment of Fusion Networks' business.
The Company intends to record and account for this investment on the cost basis
and will value this investment and the 3,500,000 shares of the Company's common
stock that it exchanged at $25,500,000, the fair market value of the MSGI common
stock that the Company received.
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APPENDIX A
PLAN OF REORGANIZATION AND MERGER
PLAN OF REORGANIZATION AND MERGER ("Agreement"), dated as of August 18,
1999, among IDM ENVIRONMENTAL CORP., a New Jersey corporation (the "Company"),
IDM/FUSION HOLDINGS, INC., a Delaware corporation ("Holdings") and a direct,
wholly-owned subsidiary of the Company, and IDM MERGER SUBSIDIARY., INC., a
Delaware corporation ("Mergeco") and a direct, wholly-owned subsidiary of
Holdings.
RECITALS
WHEREAS, as of the close of business on August 18, 1999, the authorized
capital stock of the Company consisted of 7,500,000 shares of common stock, par
value $.01 per share ("Company Common Stock"), and 1,000,000 shares of preferred
stock, par value $1.00 per share ("Company Preferred Stock"). As of August 18,
1999 (i) 3,331,085 shares of Company Common Stock were issued and outstanding;
(ii) 47,500 shares of Company Common Stock were reserved for issuance under the
Company's 1993 Stock Option Plan (the "1993 Plan"), of which 40,110 shares were
subject to outstanding options; (iii) 50,000 shares of Company Common Stock were
reserved for issuance pursuant to Company's 1995 Stock Option Plan (the "1995
Plan"), of which 46,900 shares were subject to outstanding options; (iv)
1,700,000 shares of Company Common Stock were reserved for issuance pursuant to
Company's 1998 Stock Option Plan (the "1998 Plan"), including 1,600,000 shares
reserved for issuance under the 1998 Plan which are subject to approval by the
Company stockholders relating to an amendment to increase the shares reserved
under the 1998 Plan in said amount, of which 1,040,880 shares were subject to
outstanding options; (v) 350,000 shares were reserved for issuance to various
consultants in payment for past and future services, and (vi) shares of Company
Common Stock were reserved and subject to issuance under various other options,
warrants and convertible notes (the "Other Derivative Securities") in the
amounts listed in Schedule 1 attached hereto. As of the date hereof, no shares
of Company Common Stock were held in treasury, no shares of Company Preferred
Stock are issued and outstanding and 200,000 shares of Company Preferred Stock
are reserved for issuance upon exercise of the Company Rights pursuant to the
Company Rights Agreement.
WHEREAS, as of the date hereof, the authorized capital stock of Holdings
consists of 200 shares of common stock, no par value ("Holdings Common Stock"),
of which 1 share is issued and outstanding and no shares are held in treasury.
WHEREAS, the designations, rights, powers and preferences, and the
qualifications, limitations and restrictions thereof, of the Holdings Common
Stock are the same as those of the Company Common Stock.
WHEREAS, the Certificate of Incorporation and the By-laws of Holdings
immediately after the Effective Time (as hereinafter defined) will contain
provisions identical to the Amended Certificate of Incorporation and By-laws of
the Company immediately before the Effective Time.
WHEREAS, the directors of the Company immediately prior to the Merger (as
hereinafter defined) will be the directors of Holdings as of the Effective Time.
WHEREAS, Holdings and Mergeco are newly formed corporations organized for
the purpose of participating in the transactions herein contemplated.
WHEREAS, the Company desires to create a new holding company structure by
merging Mergeco with and into the Company with the Company being the surviving
corporation (sometimes hereinafter referred to as the "Surviving Corporation"),
and converting each outstanding share of Company Common Stock into one share of
Holdings Common Stock, all in accordance with the terms of this Agreement.
WHEREAS, the Boards of Directors of Holdings , Mergeco and the Company have
approved this Agreement and the merger of Mergeco with and into the Company upon
the terms and subject to the conditions set forth in this Agreement (the
"Merger") and has directed that the Merger be submitted to a vote of the
stockholders of the Company at a special meeting to be called for the purpose of
approving the Merger.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained in this Agreement, and intending to be legally bound
hereby, the Company, Holdings and Mergeco hereby agree as follows:
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ARTICLE I
THE MERGER
Section 1.1 The Merger. In accordance with the Delaware General Corporation
Law ("DGCL") and the New Jersey Business Corporation Act ("NJBCA") and subject
to and upon the terms and conditions of this Agreement, Mergeco shall, at the
Effective Time, be merged with and into the Company, the separate corporate
existence of Mergeco shall cease and the Company shall continue as the surviving
corporation. The Company as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation." At the
Effective Time, the effect of the Merger shall be as provided in the DGCL and
NJBCA.
Section 1.2 Effective Time. The Merger shall become effective upon the
filing of a copy of this Agreement with the Secretary of State of the State of
Delaware and the Secretary of State of the State of New Jersey (the time of such
filing being referred to herein as the "Effective Time").
Section 1.3 Amended and Restated Certificate of Incorporation of the
Surviving Corporation. From and after the Effective Time, the Amended and
Restated Certificate of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation until thereafter amended as provided by law; provided,
however, that, from and after the Effective Time, Article III shall be amended
so as to read in its entirety as described in Schedule 2 attached hereto.
Section 1.4 By-laws. From and after the Effective Time, the By-laws of the
Company, as in effect immediately prior to the Effective Time, shall be the
By-laws of the Surviving Corporation until thereafter amended as provided
therein or by applicable law.
Section 1.5 Directors. The directors of the Company immediately prior to
the Effective Time shall be the initial directors of the Surviving Corporation
and will hold office from the Effective Time until their successors are duly
elected or appointed and qualified in the manner provided in the Certificate of
Incorporation and the By-laws of the Surviving Corporation or as otherwise
provided by law.
Section 1.6 Officers. The officers of the Company immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation and
will hold office from the Effective Time until their successors are duly elected
or appointed and qualified in the manner provided in the Certificate of
Incorporation and the By-laws of the Surviving Corporation or as otherwise
provided by law.
Section 1.7 Additional Actions. Subject to the terms of this Agreement, the
parties hereto shall take all such reasonable and lawful action as may be
necessary or appropriate in order to effectuate the Merger. If, at any time
after the Effective Time, the Surviving Corporation shall consider or be advised
that any deeds, bills of sale, assignments, assurances or any other actions or
things are necessary or desirable to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, properties or assets of either of Mergeco or the
Company acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger or otherwise to carry out this Agreement, the
officers of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of Mergeco and the Company, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of Mergeco and the Company or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agreement.
Section 1.8 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Holdings, Mergeco, the Company
or the holder of any of the following securities:
(a) Each issued and outstanding share of Holdings Common Stock owned of
record by the Company immediately prior to the Effective Time shall be cancelled
and retired without payment of any consideration therefor and shall cease to
exist and no Company Common Stock or other consideration shall be delivered in
exchange for any such Holdings Common Stock.
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(b) Each share or fraction of a share of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into one,
or an equal fraction of one, duly issued, fully paid and nonassessable share of
Holdings Common Stock.
(c) Each share of common stock, par value $0.01 per share, of Mergeco
issued and outstanding immediately prior to the Effective Time shall be
converted into and thereafter represent one duly issued, fully paid and
nonassessable share of common stock, par value $0.01 per share, of the Surviving
Corporation.
(d) From and after the Effective Time, holders of certificates formerly
evidencing Company Common Stock shall cease to have any rights as stockholders
of the Company, except as provided by law; provided, however, that such holders
shall have the rights set forth in Section 1.9 herein.
Section 1.9 No Surrender of Certificates; Stock Transfer Books. At the
Effective Time, the designations, rights, powers and preferences, and
qualifications, limitations and restrictions thereof, of the capital stock of
Holdings, will, in each case, be identical with those of the Company immediately
prior to the Effective Time. Accordingly, until thereafter surrendered for
transfer or exchange in the ordinary course, each outstanding certificate that,
immediately prior to the Effective Time, evidenced Company Common Stock shall,
from the Effective Time, be deemed and treated for all corporate purposes to
evidence the ownership of the same number of shares of Holdings Common Stock.
ARTICLE II
ACTIONS TO BE TAKEN IN
CONNECTION WITH THE MERGER
Section 2.1 Assumption of Plans. Holdings and the Company hereby agree that
they will, at the Effective Time, execute, acknowledge and deliver an assumption
agreement pursuant to which Holdings will, from and after the Effective Time,
assume and agree to perform all obligations of the Company pursuant to (a) the
Company's 1993, (b) the Company's 1995 Plan, (c) the Company's 1998 Plan, and
(d) the Company's Other Derivative Securities listed on Schedule 1 attached
hereto.
Section 2.2 Reservation of Shares. On or prior to the Effective Time,
Holdings will reserve sufficient shares of Holdings Common Stock to provide for
the issuance of Holdings Common Stock upon exercise of options outstanding under
the 1993 Plan, the 1995 Plan and the 1998 Plan, and the exercise or conversion
of all Other Derivative Securities.
ARTICLE III
CONDITIONS OF MERGER
Section 3.1 Conditions Precedent. The obligations of the parties to this
Agreement to consummate the Merger and the transactions contemplated by this
Agreement shall be subject to fulfillment or waiver by the parties hereto at or
prior to the Effective Time of each of the following conditions:
(a) No order, statute, rule, regulation, executive order, injunction, stay,
decree, judgment or restraining order that is in effect shall have been enacted,
entered, promulgated or enforced by any court or governmental or regulatory
authority or instrumentality which prohibits or makes illegal the consummation
of the Merger or the transactions contemplated hereby.
(b) Friedman Siegelbaum LLP , special tax counsel to the Company, shall not
have withdrawn its opinion that holders of the Company Common Stock will not
recognize gain or loss for United States federal income tax purposes as a result
of the Merger.
(c) The Merger shall have received approval by the holders of the Company
Common Stock in the manner required by the Bylaws and Certificate of
Incorporation of the Company and the NJBCA.
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ARTICLE IV
COVENANTS
Section 4.1 Further Actions. Prior to the Effective Time, the Company, in
its capacity as the sole stockholder of Holdings, will, if necessary to comply
with the NJBCA and the DGCL, take all actions reasonably necessary to carry out
the purposes of this agreement.
Section 4.3 The Plans and Other Derivative Securities. The Company and
Holdings will take or cause to be taken all actions necessary or desirable in
order for Holdings to assume the 1993 Plan, the 1995 Plan and the 1998 Plan and
the obligations under the Other Derivative Securities.
ARTICLE V
TERMINATION AND AMENDMENT
Section 5.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time by
action of the Board of Directors of the Company, the Board of Directors of
Holdings or the Board of Directors of Mergeco if such Board of Directors should
determine that for any reason the completion of the transactions provided for
herein would be inadvisable or not in the best interest of such corporation or
its stockholders. In the event of such termination and abandonment, this
Agreement shall become void and neither the Company, Holdings or Mergeco nor
their respective stockholders, directors or officers shall have any liability
with respect to such termination and abandonment.
Section 5.2 Amendment. This Agreement may be supplemented, amended or
modified by the mutual consent of the Boards of Directors of the parties to this
Agreement to the fullest extent permitted by law.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1 Governing Law. This Agreement shall be governed by and
construed and enforced under the laws of the State of New Jersey.
Section 6.2 Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to be an original but
all of which shall constitute one and the same agreement.
Section 6.3 Entire Agreement. This Agreement, including the documents and
instruments referred to herein, constitutes the entire agreement and supersedes
all other prior agreements and undertakings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
IN WITNESS WHEREOF, Holdings, Mergeco and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
IDM ENVIRONMENTAL CORP. IDM MERGER SUBSIDIARY., INC.
a New Jersey corporation (the "Company") a Delaware corporation ("Mergco")
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
----------------------- ----------------------
Joel Freedman, President Joel Freedman, President
IDM/FUSION HOLDINGS, INC.
a Delaware corporation ("Holdings")
By: /S/ JOEL FREEDMAN
-----------------------
Joel Freedman, President
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APPENDIX B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 18, 1999 is among
FUSION NETWORKS, INC., a Delaware corporation (the "Fusion"), IDM ENVIRONMENTAL
CORP., a New Jersey corporation ("IDM"), IDM/FUSION HOLDINGS, INC. ("Parent"),
and IDM/FNI ACQUISITION CORPORATION, a Delaware corporation and a direct wholly
owned subsidiary of Parent (the "Merger Subsidiary").
WHEREAS, Fusion is a newly formed corporation, formed and capitalized
pursuant to a business plan, a copy of which has been provided to IDM and Parent
(the "Business Plan");
WHEREAS, IDM is a diversified services and project development company;
WHEREAS, management of IDM and Fusion have entered into negotiations and
agreed in principle as to the terms on which IDM would form Parent and Merger
Subsidiary for the purpose of forming a holding company structure under which
IDM would become a wholly-owned subsidiary of Parent and Merger Subsidiary would
merge with and into Fusion causing Fusion to become a wholly-owned subsidiary of
Parent;
WHEREAS, it is contemplated that on or prior to the Effective Time of the
Merger pursuant to this Merger Agreement, the following will have occurred:
Pursuant to a Plan of Reorganization and Merger (the "IDM Reorganization") dated
August 18, 1999, among IDM, Parent and IDM Merger Subsidiary, Inc., IDM will
have been restructured into a holding company structure pursuant to which Parent
will be the sole owner of all outstanding IDM capital stock and the holders of
IDM stock will be stockholders of Parent (for purposes hereof, the IDM
Reorganization shall be assumed to have been consummated prior to the Effective
Time and all representations and undertakings of Parent hereunder shall be
deemed to be representations and undertakings of IDM for periods prior to
consummation of the IDM Reorganization);
WHEREAS, the respective Boards of Directors of the Fusion, Parent and the
Merger Subsidiary, and Parent as the sole stockholder of the Merger Subsidiary,
each have, in light of and subject to the terms and conditions set forth herein,
resolved to deem this Agreement and the transactions contemplated hereby,
including the Merger (as defined in Section 1.1), taken together, advisable and
fair to, and in the best interests of, their respective stockholders; and
WHEREAS, for federal income Tax (as defined in Section 3.16) purposes, it
is intended that the Merger shall qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, and intending to be
legally bound hereby, the Fusion, Parent and the Merger Subsidiary hereby agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. At the Effective Time (as defined in Section 1.2),
upon the terms and subject to the conditions of this Agreement and in accordance
with the Delaware General Corporation Law (the "DGCL"), the Merger Subsidiary
shall be merged with and into the Fusion ("Merger"). Following the Merger, the
Fusion shall continue as the surviving corporation (the "Surviving Corporation")
and shall continue its corporate existence under the DGCL, and the separate
corporate existence of the Merger Subsidiary shall cease.
SECTION 1.2 Effective Time. Subject to the provisions of this Agreement,
Parent, the Merger Subsidiary and the Fusion shall cause the Merger to be
consummated by (i) filing a certificate of merger complying with the DGCL with
the Secretary of State of the State of Delaware (the "Certificate of Merger") as
soon as practicable on or after the Closing Date (as defined in Section 1.3).
The Merger shall become effective upon the later of such filing or at such time
thereafter as is provided in the Certificate of Merger (the "Effective Time").
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SECTION 1.3 Closing of the Merger. The closing of the Merger (the
"Closing") will take place at a time and on a date (the "Closing Date") to be
specified by the parties, which shall be no later than the fifteenth business
day after satisfaction or waiver of the conditions set forth in Article VII
(other than those conditions that by their nature are to be satisfied at the
Closing, but subject to the fulfillment or waiver of those conditions), at the
offices of Oscar D. Folger, Esq., 521 Fifth Avenue, New York, New York 10175,
unless another time, date or place is agreed to in writing by the parties
hereto.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the properties, rights, privileges,
immunities, powers and franchises of the Fusion and the Merger Subsidiary shall
vest in the Surviving Corporation, and all debts, liabilities, obligations and
duties of the Fusion and the Merger Subsidiary shall become the debts,
liabilities, obligations and duties of the Surviving Corporation.
SECTION 1.5 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of the Fusion in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation, until
amended in accordance with such Certificate of Incorporation and the DGCL. The
Bylaws of the Fusion in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation, until amended in accordance with such
Bylaws, the Certificate of Incorporation and the DGCL.
SECTION 1.6 Directors. The directors of the Merger Subsidiary immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation until such director's
successor is duly elected or appointed and qualified.
SECTION 1.7 Officers. The officers of Fusion at the Effective Time shall be
the initial officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until such officer's successor is duly elected or appointed and
qualified.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.1 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of any of the parties hereto or
any holder of shares of Fusion Common Stock (as defined in Section 2.1(c)):
(a) Securities of the Merger Subsidiary and Parent. The issued and
outstanding securities of Fusion shall remain outstanding and shall be unchanged
as a result of the Merger (except that ownership of the Fusion shares shall pass
to Parent pursuant to Section 2.1(c)). The issued and outstanding securities of
Parent shall remain outstanding and shall be unchanged as a result of the
Merger.
(b) Cancellation of Treasury Shares and Parent-Owned Shares. Each share of
Merger Subsidiary Common Stock issued and outstanding immediately prior to the
Effective Time that is owned by Fusion, or by Parent, the Merger Subsidiary or
any other subsidiary of Parent (other than shares in trust accounts, managed
accounts, custodial accounts and the like that are beneficially owned by third
parties) shall automatically be cancelled and shall cease to exist, and no
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion of Fusion Common Stock. Each share of common stock of Fusion
("Fusion Common Stock") issued and outstanding immediately prior to the
Effective Time (individually, a "Share" and collectively, the "Shares") shall be
converted into and be exchangeable for the right to receive 17,733.333 fully
paid and non-assessable shares of common stock, par value $.01 per share, of
Parent, or an aggregate of 26,600,000 shares of Parent Common Stock; provided,
however, that the aggregate number of shares of Parent Common Stock issuable
pursuant to the Merger shall be increased proportionately to the extent that
Fusion issues additional shares of common stock as permitted by Section 5.1(b)
hereof.
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(d) Certain Adjustments. If between the date of this Agreement and the
Effective Time the outstanding shares of Parent Common Stock shall have been
changed into a different number of shares or a different class by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares or any similar event, the amount of shares of
Parent Common Stock to be issued pursuant to Section 2.1(c) above shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares or
such similar event.
SECTION 2.2 No Fractional Shares of Parent Common Stock. No certificates or
scrip of shares of Parent Common Stock representing fractional shares of Parent
Common Stock or book-entry credit of the same shall be issued upon the surrender
for exchange of certificates representing outstanding Shares and such fractional
share interests will not entitle the owner thereof to vote or to have any rights
of a shareholder of Parent or a holder of shares of Parent Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FUSION
Except as set forth in the disclosure schedule delivered by Fusion to
Parent prior to the execution of this Agreement (the "Fusion Disclosure
Schedule") (each Section of which qualifies the correspondingly numbered
representation and warranty or covenant to the extent specified therein), Fusion
hereby represents and warrants to each of Parent, IDM and the Merger Subsidiary
as follows:
SECTION 3.1 Organization and Qualification; Subsidiaries.
(a) Fusion and each of its subsidiaries is a corporation or legal entity
duly organized, validly existing and in good standing under the Laws (as defined
in Section 3.9) of the jurisdiction of its incorporation and has all requisite
corporate, partnership or similar power and authority to own, lease and operate
its properties and to carry on its businesses as now conducted and proposed by
Fusion to be conducted.
(b) Section 3.1 of the Fusion Disclosure Schedule sets forth a list of all
subsidiaries of Fusion. Except as listed in Section 3.1 of the Fusion Disclosure
Schedule, Fusion does not own, directly or indirectly, beneficially or of
record, any shares of capital stock or other security of any other entity or any
other investment in any other entity.
(c) Each of Fusion and its subsidiaries is duly qualified or licensed and
in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so duly qualified or licensed and in good standing does not and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Fusion.
(d) Fusion has heretofore delivered to Parent accurate and complete copies
of the articles or certificate of incorporation and codes of regulations, bylaws
or other similar organizational documents, as currently in effect, of each of
Fusion and each of its subsidiaries.
SECTION 3.2 Capitalization of Fusion and Its Subsidiaries.
(a) The authorized capital stock of Fusion consists of 3,000 shares of
Fusion Common Stock. As of August 18, 1999, 1,500 shares of Fusion Common Stock
were issued and outstanding; and (ii) no shares of Fusion Common Stock were
issued and held in the treasury of Fusion. All the outstanding shares of Fusion
Common Stock are duly authorized, validly issued, fully paid and non-assessable.
Except as set forth above or in Section 3.2(a) of the Fusion Disclosure Schedule
(1) there are no shares of capital stock or other voting securities of Fusion
authorized, issued or outstanding, (2) there are no outstanding options,
warrants, calls, preemptive rights, subscriptions or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock or other voting securities of Fusion or any of its subsidiaries,
obligating Fusion or any of its subsidiaries to issue, transfer or sell or cause
to be issued, transferred or sold any shares of capital stock, voting securities
or other equity interest in Fusion or any of its subsidiaries or securities
convertible into or exchangeable for such shares or equity interests, or
obligating Fusion or any of its subsidiaries to grant, extend or enter into any
such option, warrant, call, subscription or other right, agreement, arrangement
or commitment, or (3) there are no outstanding contractual obligations of Fusion
or any of its subsidiaries to repurchase, redeem or otherwise acquire any Shares
or other capital stock of Fusion or any subsidiary or to provide funds to make
any investment (in the form of a loan, capital contribution or otherwise) in any
subsidiary or any other entity other than loans to Subsidiaries in the ordinary
course of business. There are no stockholder agreements, voting trusts or other
agreements or understandings to which Fusion or any of its subsidiaries is a
party or by which it is bound relating to the voting of any shares of capital
stock of Fusion.
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(b) All of the outstanding capital stock of Fusion's subsidiaries is owned
by Fusion, directly or indirectly, free and clear of any Lien (as hereinafter
defined) or any other limitation or restriction (including any restriction on
the right to vote, transfer or sell the same, except as may be provided as a
matter of Law). There are no securities of Fusion or its subsidiaries
convertible into or exchangeable for, no options or other rights to acquire from
Fusion or its subsidiaries, and no other contract, understanding, arrangement or
obligation (whether or not contingent) providing for the issuance or sale,
directly or indirectly of, any capital stock or other ownership interests in, or
any other securities of, any subsidiary of Fusion. There are no outstanding
contractual obligations of Fusion or its subsidiaries to repurchase, redeem or
otherwise acquire any outstanding shares of capital stock or other ownership
interests in any subsidiary of Fusion. For purposes of this Agreement, "Lien"
means, with respect to any asset (including, without limitation, any security)
any mortgage, lien, pledge, charge, security interest or encumbrance of any kind
in respect of such asset.
SECTION 3.3 Authority Relative to This Agreement; Consents and Approvals.
(a) Fusion has all necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby
and no other corporate proceedings on the part of Fusion are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
(other than, with respect to the Merger and this Agreement, the Fusion Requisite
Vote (as hereinafter defined)). This Agreement has been duly and validly
executed and delivered by Fusion and, assuming the due authorization, execution
and delivery hereof by each of Parent and the Merger Subsidiary, constitutes a
valid, legal and binding agreement of Fusion, enforceable against Fusion in
accordance with its terms.
(b) The Board of Directors of Fusion (the "Fusion Board") has duly and
validly authorized the execution and delivery of this Agreement and approved the
consummation of the transactions contemplated hereby, and taken all corporate
actions required to be taken by the Fusion Board for the consummation of the
transactions, including the Merger, contemplated hereby and has resolved (i) to
deem this Agreement and the transactions contemplated hereby, including the
Merger, taken together, advisable and fair to, and in the best interests of,
Fusion and its stockholders; and (ii) to recommend that the stockholders of
Fusion approve and adopt this Agreement. The Fusion Board has directed that this
Agreement be submitted to the stockholders of Fusion for their approval by
written consent or at a meeting to be held for that purpose. The affirmative
vote of the holders of a majority of the voting stock of Fusion (which is
comprised solely of Fusion Common Stock (the "Voting Shares"))(the "Fusion
Requisite Vote") are the only votes of the holders of any class or series of
capital stock of Fusion necessary to adopt this Agreement and approve the
transactions contemplated hereby, including the Merger. No other vote of the
stockholders of Fusion is required by law, the articles of incorporation or the
code of regulations of Fusion or otherwise in order for Fusion to approve and
adopt this Agreement or to consummate the transactions contemplated hereby.
SECTION 3.4 Business Plan. Fusion has been formed, capitalized and operated
to date, and until the Effective Time will be capitalized and operated,
consistent with the Business Plan.
SECTION 3.5 Financial Statements. Fusion is newly formed and, except as
contemplated in the Business Plan, has no material assets and, through the date
hereof, has had no material operations and has not completed a fiscal quarter
for purposes of preparing financial statements. If requested, by Parent, Fusion
will prepare and deliver to Parent unaudited financial statements and such other
financial statements, whether audited or unaudited, as may be required by Parent
to comply with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Any such financial statements so
delivered by Fusion shall be prepared in conformity with generally accepted
accounting principles applied on a consistent basis ("GAAP").
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SECTION 3.6 No Undisclosed Liabilities. Neither Fusion nor any of its
subsidiaries has any material liabilities or obligations of any nature, whether
or not accrued, contingent or otherwise, and there is no existing condition,
situation or set of circumstances known to Fusion which could be expected to
result in such a liability or obligation, except (a) liabilities or obligations
reflected in Fusion financial statements and (b) liabilities or obligations
incurred in the ordinary course of business which do not and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Fusion.
SECTION 3.7 Absence of Changes. Except as and to the extent disclosed to
Parent, as set forth in Section 3.7 of the Fusion Disclosure Schedule or as
permitted by Section 5.1, since inception Fusion and its subsidiaries have
conducted their business in the ordinary and usual course consistent with
Business Plan and there has not been:
(a) any event, change, occurrence or development which does or would
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Fusion;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Fusion or any
repurchase, redemption or other acquisition by Fusion or any subsidiary of any
Fusion securities;
(c) any amendment of any term of any outstanding security of Fusion or any
subsidiary;
(d) (i) any incurrence or assumption by Fusion or any subsidiary of any
indebtedness for borrowed money (A) other than in the ordinary and usual course
of business consistent with the Business Plan or (B) in connection with any
acquisition or capital expenditure permitted by Section 5.1 or (ii) any
guarantee, endorsement or other incurrence or assumption of liability (whether
directly, contingently or otherwise) by Fusion or any subsidiary for the
obligations of any other person (other than any wholly owned subsidiary of
Fusion), other than in the ordinary and usual course of business consistent with
the Business Plan;
(e) any creation or assumption by Fusion or any subsidiary of any Lien on
any material asset of Fusion or any subsidiary other than in the ordinary and
usual course of business consistent with past practice;
(f) any making of any loan, advance or capital contribution to or
investment in any person by Fusion or any subsidiary other than (i) any
acquisition permitted by Section 5.1, (ii) loans, advances or capital
contributions to or investments in wholly owned subsidiaries of Fusion or (iii)
loans or advances to employees of Fusion or any subsidiary made in the ordinary
and usual course of business consistent with the Business Plan;
(g) (i) any contract or agreement entered into by Fusion or any subsidiary
on or prior to the date hereof relating to any material acquisition or
disposition of any assets or business or (ii) any modification, amendment,
assignment, termination or relinquishment by Fusion or any subsidiary of any
contract, license or other right that does or would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Fusion,
other than, in the case of (i) and (ii), transactions, commitments, contracts or
agreements in the ordinary and usual course of business consistent with the
Business Plan and those contemplated by this Agreement;
(h) any material change in any method of accounting or accounting
principles or practice by Fusion or any subsidiary, except for any such change
required by reason of a change in GAAP; or
(i) any (i) grant of any severance or termination pay to any director,
officer or employee of Fusion or any of its subsidiaries; (ii) entering into of
any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or employee
of Fusion or any of its subsidiaries (it being acknowledged and agreed that the
hiring of employees in the ordinary course of business on an at-will basis shall
not be deemed the entering into of an employment or similar agreement); (iii)
increase in benefits payable under any existing severance or termination pay
policies or employment agreements; or (iv) increase in compensation, bonus or
other benefits payable to directors, officers or employees of Fusion or any of
its subsidiaries other than, in the case of clause (iv) only, increases in
compensation, bonus or other benefits payable to employees of Fusion or any of
its subsidiaries in the ordinary and usual course of business consistent with
the Business Plan or merit increases in salaries of employees at regularly
scheduled times in customary amounts consistent with past practices. SECTION 3.8
Information Supplied. None of the information supplied or to be supplied by
Fusion for inclusion or incorporation by reference in the proxy statement
relating to the Parent Stockholder Meeting (as defined in Section 6.1) (the
"Proxy Statement"), including but not limited to the Business Plan, will, at the
date mailed to stockholders and at the time of the meeting of stockholders,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Parent Stockholder Meeting any event
with respect to Fusion, its officers and directors or any of its subsidiaries
should occur which is required to be described in an amendment of, or a
supplement to, the Proxy Statement, Fusion shall promptly so advise Parent and
such event shall be so described, and such amendment or supplement shall be
promptly filed with the SEC and, as required by Law, disseminated to the
stockholders of the Parent.
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SECTION 3.9 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Nasdaq SmallCap Market, the Securities
Act, the Exchange Act, state securities or blue sky Laws, and any other
applicable state regulatory agency, the filing and recordation of the
Certificate of Merger as required by the DGCL and as otherwise set forth in
Section 3.9 to Fusion Disclosure Schedule (collectively, the "Fusion Required
Approvals"), no filing with or notice to, and no permit, authorization, consent
or approval of, any court or tribunal or administrative, governmental or
regulatory body, agency or authority is necessary for the execution and delivery
by Fusion of this Agreement or the consummation by Fusion of the transactions
contemplated hereby, except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings or give such
notice does not and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on Fusion. Neither the execution,
delivery and performance of this Agreement by Fusion nor the consummation by
Fusion of the transactions contemplated hereby will (i) conflict with or result
in any breach of any provision of the respective articles or certificate of
incorporation or code of regulations or bylaws (or similar governing documents)
of Fusion or any of its subsidiaries, (ii) result in a violation or breach of,
or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Fusion or any of its subsidiaries is a party
or by which any of them or any of their respective properties or assets may be
bound (collectively, the "Fusion Agreements"), or (iii) violate any Law
applicable to Fusion or any of its subsidiaries or any of their respective
properties or assets, except in the case of (ii) or (iii) for violations,
breaches or defaults which do not or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion. Section
3.9 of the Fusion Disclosure Schedule sets forth a list of all material third
party consents and approvals required to be obtained under the Fusion Agreements
prior to the consummation of the transactions contemplated by this Agreement.
SECTION 3.10 No Default. Neither Fusion nor any of its subsidiaries is in
violation of any term of (i) its articles or certificate of incorporation, code
of regulations, bylaws or other organizational documents, (ii) any agreement or
instrument related to indebtedness for borrowed money or any other agreement to
which it is a party or by which it is bound, or (iii) any foreign or domestic
law, order, writ, injunction, decree, ordinance, award, stipulation, statute,
judicial or administrative doctrine, rule or regulation entered by a
Governmental Entity ("Law") applicable to Fusion, its subsidiaries or any of
their respective properties or assets, except, in the case of (ii) and (iii),
for violations which do not or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion or to
prevent or materially delay the performance of this Agreement by Fusion.
SECTION 3.11 Real Property.
(a) Fusion owns no fee interest in any real property.
(b) Section 3.11(b) of the Fusion Disclosure Schedule sets forth all
leases, subleases and other agreements (the "Real Property Leases") under which
Fusion or any of its subsidiaries uses or occupies or has the right to use or
occupy, now or in the future, any real property that is material to the conduct
of the business of Fusion and its subsidiaries, taken as a whole. Fusion has
heretofore delivered to Parent true, correct and complete copies of all Real
Property Leases (and all modifications, amendments and supplements thereto and
all side letters to which Fusion or any of its subsidiaries is a party affecting
the obligations of any party thereunder). Each Real Property Lease constitutes
the valid and legally binding obligation of Fusion or its subsidiaries,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar Laws of general applicability relating to or
affecting creditors' rights or by general equity principles), and is in full
force and effect. All rent and other sums and charges payable by Fusion and its
subsidiaries as tenants under each Real Property Lease are current, no
termination event or condition or uncured default of a material nature on the
part of Fusion or any such subsidiary or, to Fusion's knowledge, the landlord,
exists under any Real Property Lease. Each of Fusion and its subsidiaries has a
good and valid leasehold interest in each parcel of real property leased by it
free and clear of all Liens, except (i) Taxes and general and special
assessments not in default and payable without penalty and interest, and (ii)
other liens, mortgages, pledges, encumbrances and security interests which do
not materially interfere with Fusion's or any of its subsidiaries' use and
enjoyment of such real property or materially detract from or diminish the value
thereof.
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(c) No party to any such Real Property Leases has given notice to Fusion or
any of its subsidiaries of or made a claim against Fusion or any of its
subsidiaries with respect to any material breach or default thereunder.
SECTION 3.12 Litigation. Except as and to the extent disclosed in Section
3.12 of the Fusion Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation pending or, to Fusion's knowledge, threatened
against Fusion or any of its subsidiaries or any of their respective properties
or assets which (a) does or would reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on Fusion or (b) as of the date
hereof, questions the validity of this Agreement or any action to be taken by
Fusion in connection with the consummation of the transactions contemplated
hereby or could otherwise prevent or delay the consummation of the transactions
contemplated by this Agreement. Except as and to the extent publicly disclosed
by Fusion in Section 3.12 of the Fusion Disclosure Schedule, there is no
judgment, order, writ, injunction or decree outstanding against Fusion or its
subsidiaries which does or would reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Fusion.
SECTION 3.13 Fusion Permits; Compliance with Applicable Laws. Fusion and
its subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Fusion Permits"), except for failures to hold such
permits, licenses, variances, exemptions, orders and approvals which do not or
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Fusion. Fusion and its subsidiaries are in compliance
in all material aspects with the terms of the Fusion Permits, except where the
failure to so comply does not or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion. The
businesses of Fusion and its subsidiaries are not being conducted in violation
of any Law applicable to Fusion or its subsidiaries, except for violations or
possible violations which do not and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion. To
Fusion's knowledge, no investigation or review by any Governmental Entity with
respect to Fusion or its subsidiaries is pending or threatened, nor, to Fusion's
knowledge, has any Governmental Entity indicated an intention to conduct the
same.
SECTION 3.14 Employee Plans.
(a) Except as and to the extent disclosed in Section 3.14(a) of the Fusion
Disclosure Schedule there are no "employee benefit plans," as defined in Section
3(3) of ERISA, employment, executive compensation, consulting or other
compensation agreements, and stock option, stock award, stock purchase or other
equity-based compensation, deferred compensation, severance, salary
continuation, life insurance, bonus or other incentive compensation programs or
arrangements, and directors' benefit, bonus or other incentive compensation
arrangements, for which Fusion or any of its subsidiaries has any obligation to
or liability, contingent or otherwise (each, an "Employee Benefit Plan" and
collectively, the "Employee Benefit Plans")
(f) Except as set forth in Section 3.14(b) of the Fusion Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will by itself or in
combination with any other event (i) result in any payment becoming due, or
increase the amount of compensation due, to any current or former employee of
Fusion or any of its subsidiaries; (ii) increase any benefits otherwise payable
under any Employee Benefit Plan; or (iii) result in the acceleration of the time
of payment or vesting of any such benefits.
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SECTION 3.15 Labor Matters.
(a) Except as set forth in Section 3.15(a) of the Fusion Disclosure, there
are no employment, labor or collective bargaining agreements which pertain to
employees of Fusion or any of its subsidiaries. Fusion has heretofore delivered
to Parent true and complete copies of (i) the employment agreements listed on
Section 3.15(a) of the Fusion Disclosure Schedule and (ii) the labor or
collective bargaining agreements listed on Section 3.15(a) of the Fusion
Disclosure Schedule, together with all material amendments, modifications and
supplements thereto and side letters materially affecting the duties, rights and
obligations of any party thereunder.
(b) Fusion and each of its subsidiaries is in compliance in all material
respects with all Laws relating to the employment of labor, including all such
Laws and orders relating to wages, hours, collective bargaining, discrimination,
civil rights, safety and health workers' compensation and the collection and
payment of withholding and/or Social Security Taxes and similar Taxes.
SECTION 3.16 Environmental Matters. Except as set forth in Section 3.16 of
the Fusion Disclosure Schedule, the operations of Fusion and its subsidiaries
have been and, as of the Closing Date, will be, in compliance with all
applicable environmental Laws, except for noncompliance that does not and would
not reasonably be expected to result in Fusion and its subsidiaries incurring
material environmental costs and liabilities, and Fusion is not aware of any
facts, circumstances or conditions, which without significant capital
expenditures, would prevent material compliance in the future.
SECTION 3.17 Taxes.
(a) As of the date hereof, Fusion has not been required to file any Tax
Returns and has not paid, or been required to pay, any material taxes and is not
subject to, and has not been subject to, any audits, administrative or court
proceedings or claims with respect to Taxes.
(b) In the event the Operating files a Tax Return or pays any material
taxes on or before the Effective Date, Fusion shall provide a true and complete
copy of each such Tax Return to Parent and shall provide prompt written notice
of any Taxes paid.
(c) For purposes of this Agreement:
"Taxes" includes all forms of taxation, whenever created or imposed, and
whether of the United States or elsewhere, and whether imposed by a local,
municipal, governmental, state, foreign, Federal or other Governmental Entity,
or in connection with any agreement with respect to Taxes including all
interest, penalties and additions imposed with respect to such amounts.
"Tax Returns" means all Federal, state, local, provincial and foreign Tax
returns, declarations, statements, reports, schedules, forms and information
returns and any amended Tax return relating to Taxes.
SECTION 3.18 Absence of Questionable Payments.
(a) Neither Fusion nor any of its subsidiaries nor, to Fusion's knowledge,
any director, officer, agent, employee or other person acting on behalf of
Fusion or any of its subsidiaries, has used any corporate or other funds for
unlawful contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither Fusion nor any of its subsidiaries nor,
to Fusion's knowledge, any director, officer, agent, employee or other person
acting on behalf of Fusion or any of its subsidiaries, has accepted or received
any unlawful contributions, payments, gifts, or expenditures.
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SECTION 3.19 Material Contracts.
(a) Section 3.19 of the Fusion Disclosure Schedule sets forth a list of all
Material Contracts (as hereinafter defined). Fusion has heretofore made
available to Parent true, correct and complete copies of all written or oral
contracts and agreements (and all material amendments, modifications and
supplements thereto and all side letters to which Fusion or any of its
subsidiaries is a party materially affecting the obligations of any party
thereunder) to which Fusion or any of its subsidiaries is a party or by which
any of its properties or assets are bound that are material to the business,
properties or assets of Fusion and its subsidiaries taken as a whole, including,
without limitation, all: (i) employment, severance, personal services or
consulting contracts (other than any such contracts that are terminable without
penalty upon not more than 90 days notice), and all non-competition or
indemnification contracts with current or former directors, officers or
employees of Fusion or any of its subsidiaries (including, without limitation,
any contract to which Fusion or any of its subsidiaries is a party involving
employees of Fusion); (ii) material license agreements relating to Intellectual
Property (as defined in Section 3.21) granting to Fusion a license to practice
technology used in the conduct of its current or planned operations; (iii)
contracts granting a right of first refusal or first negotiation for essential
properties, services or supplies, or material sales not in the ordinary course;
(iv) partnership or joint venture agreements; (v) agreements for the
acquisition, sale or lease (including leases in connection with financing
transactions) of any properties or assets of Fusion with a value in excess of
$5,000 (by merger, purchase or sale of assets or stock or otherwise) entered
into since inception; (vi) material contracts or agreements with any
Governmental Entity; (vii) loan or credit agreements, mortgages, indentures or
other agreements or instruments evidencing (A) indebtedness for borrowed money
by Fusion or any of its subsidiaries or any such agreement pursuant to which
indebtedness for borrowed money may be incurred (including guaranties) or (B)
Liens securing any such indebtedness; (viii) agreements that purport to limit,
curtail or restrict the ability of Fusion or any of its subsidiaries, or would
restrict the ability of Parent or any of its subsidiaries, to compete in any
geographic area or line of business; (ix) agreements or arrangements, including
but not limited to hedges, options, swaps, caps and collars, designed to protect
Fusion or any of its subsidiaries against fluctuations in interest rates,
currency exchange rates or the prices of certain commodities and raw materials;
(x) to the extent not otherwise required to be disclosed pursuant to any other
clause of this Section 3.19(a), contracts or agreements that would be required
to be filed as an exhibit to a Form 10-K filed by the Parent with the SEC; and
(xi) commitments and agreements to enter into any of the foregoing
(collectively, together with any such contracts entered into in accordance with
Section 5.1 hereof, the "Material Contracts"). Except as set forth in Section
3.19 of the Fusion Disclosure Schedule, neither Fusion nor any of its
subsidiaries is a party to or bound by any severance or other agreement with any
employee or consultant pursuant to which such person would be entitled to
receive any additional compensation or an accelerated payment of compensation as
a result of (x) the consummation of the transactions contemplated hereby or (y)
the termination of such employment or consulting following such consummation.
(b) Each of the Material Contracts is in full force and effect. There is no
breach or default under any Material Contract either by Fusion or, to Fusion's
knowledge, by any other party thereto, and no event has occurred that with the
lapse of time or the giving of notice or both would constitute a breach or
default thereunder by Fusion or, to Fusion's knowledge, any other party, except
for any such breach or default as does not or would not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on Fusion.
(c) No party to any such Material Contract has given notice to Fusion of or
made a claim against Fusion with respect to any breach or default thereunder,
except for any such breach or default as does not or would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
Fusion.
SECTION 3.20 Insurance. Section 3.20 of the Fusion Disclosure Schedule sets
forth a list of insurance policies (including information on the scope and
amount of the coverage and deductibles provided thereunder) maintained by Fusion
or any of its subsidiaries which policies have been issued by insurers, which,
to Fusion's knowledge, are reputable and financially sound and provide coverage
for the operations conducted by Fusion and its subsidiaries of a scope and
coverage consistent with customary industry practice. Fusion has delivered to
Parent a true and correct copy of the claims history under such policies from
inception through the date hereof.
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SECTION 3.21 Intellectual Property.
(a) Section 3.21 of the Fusion Disclosure Schedule sets forth a list of all
patents, patent rights, invention disclosure statements, trademarks, trademark
rights, trade names, trade name rights, service marks, and all applications for
any of the foregoing, of Fusion and its subsidiaries the absence of which would
reasonably be expected to have a Material Adverse Effect with respect to Fusion.
Except as set forth in Section 3.21 of the Fusion Disclosure Schedule, neither
Fusion nor any of its subsidiaries is entitled to receive or obligated to pay
any royalties or similar payments in respect of Intellectual Property.
(b) Fusion and its subsidiaries own or possess adequate licenses or other
valid rights to use (in each case, free and clear of any Liens), all
Intellectual Property (as hereinafter defined) used or held for use in
connection with the business of Fusion and its subsidiaries as currently
conducted or as contemplated to be conducted and the absence of which ownership
or rights would reasonably be expected to have a Material Adverse Effect with
respect to Fusion.
(c) The use of any Intellectual Property by Fusion and its subsidiaries
does not infringe on, or otherwise violate the rights of any person and is in
accordance with any applicable license pursuant to which Fusion or any of its
subsidiaries acquired the right to use any material Intellectual Property,
except where the result of such infringement, violation or failure does not and
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect with respect to Fusion.
(d) No person is challenging or, to the knowledge of Fusion, infringing on
or otherwise violating any right of Fusion or any of its subsidiaries with
respect to any Intellectual Property owned by and/or licensed to Fusion or its
subsidiaries, except where the result of such challenge, infringement or
violation does not and would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect with respect to Fusion.
(e) Neither Fusion nor any of its subsidiaries has received any notice
(written or otherwise) of any assertion or claim, pending or not, with respect
to any Intellectual Property used by Fusion or its subsidiaries, except where
the result of such assertion or claim does not and would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect with
respect to Fusion.
(f) No material Intellectual Property owned/or licensed by Fusion or its
subsidiaries is being used or enforced in a manner that would result in the
abandonment, cancellation or unenforceability of such Intellectual Property,
other than as does not and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion.
For purposes of this Agreement, "Intellectual Property" means (i) all
trademarks, trademark rights, trade names, trade name rights, trade dress and
other indications of origin, corporate names, brand names, logos, certification
rights, service marks, applications for trademarks and for service marks,
know-how and other proprietary rights and information, the goodwill associated
with the foregoing and registration in any jurisdiction of, and applications in
any jurisdictions to register, the foregoing, including any extension,
modification or renewal of any such registration or application; (ii) all
inventions, discoveries and ideas (whether patentable or unpatentable and
whether or not reduced to practice), in any jurisdiction, all improvements
thereto, and all patents, patent rights, applications for patents (including,
without limitation, divisions, continuations, continuations in part and renewal
applications), and any renewals, extensions or reissues thereof, in any
jurisdiction; (iii) all licenses (whether Fusion is licensor or licensee) and
other agreements relating to any Intellectual Property described in (i) or (ii);
(iv) nonpublic information, trade secrets and confidential information and
rights in any jurisdiction to limit the use or disclosure thereof by any person;
(v) writings and other works, whether copyrightable or not, in any jurisdiction,
and all registrations or applications for registration of copyrights in any
jurisdiction, and any renewals or extensions thereof; (vi) all mask works and
all applications, registrations and renewals in connection therewith, in any
jurisdiction; (vii) all computer software (including data and related
documentation); (viii) any similar intellectual property or proprietary rights;
and (ix) all copies and tangible documentation thereof and any claims or causes
of action arising out of or relating to any infringement or misappropriation of
any of the foregoing.
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SECTION 3.22 Year 2000. Fusion and its subsidiaries are not subject to any
known the Year 2000 issues which, to the knowledge of Fusion, are material to
Fusion and its subsidiaries, including issues relating to internal information
systems and process control risks, embedded circuitry risks and third party
risks.
SECTION 3.23 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission or expense reimbursement in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Fusion or any of its affiliates.
SECTION 3.24 Tax Treatment. Neither Fusion nor any of its affiliates or
stockholders has taken or agreed to take any action or is aware of any fact or
circumstance that would prevent the Merger from qualifying as a reorganization
under Section 368 of the Code.
SECTION 3.25 Takeover Statutes. Fusion has taken all action required to be
taken by it in order to exempt this Agreement and the transactions contemplated
hereby from, and this Agreement and the transactions contemplated hereby (the
"Covered Transactions") are exempt from, the requirements of any "moratorium,"
"control share," "fair price," "affiliate transaction," "business combination"
or other antitakeover Laws and regulations of any state (collectively, "Takeover
Statutes"), including, without limitation, any antitakeover provision in
Fusion's articles of incorporation or code of regulations (the "Control Shares
Acquisition Law").
SECTION 3.26 Investment Intent; Investigation. By execution of this Merger
Agreement and approval of the same by the stockholders of Fusion, Fusion and
each of its stockholders:
(a) Will acquire the shares issuable by Parent, except as otherwise
permitted hereunder, only for his/hers/its own account, for investment and
without a view to the distribution thereof;
(b) Has reviewed all filings of the Parent, and IDM, with the Securities
and Exchange Commission or with other public agencies and has been given the
opportunity to ask questions of management of the Parent and IDM to the extent
he/she/it deems necessary to enter into the transactions contemplated hereby and
has the requisite knowledge and experience in financial and other matters to
make an informed decision regarding the same;
(c) Understands that he/she/it may sell or otherwise transfer the
Securities only if such transaction is duly registered under the Securities Act
of 1933, as amended (the "Securities Act"), or pursuant to an opinion of
counsel, satisfactory to the Parent and its counsel, to the effect that such
sale or other transfer may be made in the absence of registration under the
Securities Act.
(d) Acknowledges that, except as otherwise permitted hereunder, the
certificates representing the Securities will be legended to reflect the
restrictions of Section 3.26(c), and stop transfer instructions will apply; and
(e) Realizes that the Securities are not a liquid investment, and that
he/she/it may lose his/her/its entire investment.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUBSIDIARY
Except as set forth in the disclosure schedule delivered by Parent to
Fusion prior to the execution of this Agreement (the "Parent Disclosure
Schedule") (each Section of which qualifies the correspondingly numbered
representation and warranty or covenant to the extent specified therein), and
qualified, where appropriate to give effect to the IDM Reorganization, Parent
and the Merger Subsidiary hereby represent and warrant to Fusion as follows:
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SECTION 4.1 Organization.
(a) Each of Parent and Merger Subsidiary is a corporation duly organized,
validly existing and in good standing under the Laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now conducted or
proposed by Parent or the Merger Subsidiary to be conducted, except where the
failure to be duly organized, existing and in good standing or to have such
power and authority would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on Parent or Merger Subsidiary.
(b) Each of Parent and Merger Subsidiary is duly qualified or licensed and
in good standing to do business in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so duly qualified or licensed and in good standing does not and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent or Merger Subsidiary.
(c) Parent has heretofore delivered to Fusion accurate and complete copies
of the articles of incorporation and bylaws of Parent and Merger Subsidiary as
currently in effect.
SECTION 4.2 Capitalization of Parent.
(a) The authorized capital stock of the Parent consists of 7,500,000 shares
of Parent Common Stock, par value $.01 per share, and 1,000,000 shares of
preferred stock, par value $1.00 per share ("Parent Preferred Stock"). As of
August 13, 1999, and giving effect to the IDM Reorganization, (i) 3,331,085
shares of Parent Common Stock were issued and outstanding; (ii) 47,500 shares of
Parent Common Stock were reserved for issuance under the Parent's 1993 Stock
Option Plan (the "1993 Plan"), of which 40,110 shares were subject to
outstanding options; (iii) 50,000 shares of Parent Common Stock were reserved
for issuance pursuant to Parent's 1995 Stock Option Plan (the "1995 Plan"), of
which 46,900 shares were subject to outstanding options; (iv) 1,700,000 shares
of Parent Common Stock were reserved for issuance pursuant to Parent's 1998
Stock Option Plan (the "1998 Plan"), including 1,600,000 shares reserved for
issuance under the 1998 Plan which are subject to approval by the Parent
stockholders relating to an amendment to increase the shares reserved under the
1998 Plan in said amount, of which 1,040,880 shares were subject to outstanding
options; (v) 350,000 shares were reserved for issuance to various consultants in
payment for past and future services, and (vi) shares of Parent Common Stock
were reserved and subject to issuance under various other options, warrants and
convertible notes (the "Other Derivative Securities") in the amounts listed in
Section 4.2(a) of the Parent Disclosure Schedule. As of the date hereof, no
shares of Parent Common Stock were held in treasury, no shares of Parent
Preferred Stock are issued and outstanding and 200,000 shares of Parent
Preferred Stock are reserved for issuance upon exercise of the Parent Rights
pursuant to the Parent Rights Agreement. All the outstanding shares of Parent
Common Stock are, and all shares to be issued as part of the Common Merger
Consideration will be, when issued in accordance with the terms hereof, duly
authorized, validly issued, fully paid and non-assessable. Except as set forth
above, and except for the transactions contemplated by this Agreement and
Parent's obligations under the Parent Rights Agreement, as of the date of this
Agreement (1) there are no shares of capital stock or other voting securities of
Parent authorized, issued or outstanding, (2) there are no authorized or
outstanding options, warrants, calls, preemptive rights, subscriptions or other
rights, agreements, arrangements or commitments of any character relating to the
issued or unissued capital stock or other voting securities of Parent,
obligating Parent to issue, transfer or sell or cause to be issued, transferred
or sold any shares of capital stock, voting securities or other equity interest
in Parent or securities convertible into or exchangeable for such shares or
equity interests, or obligating Parent to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment, (3) there are no outstanding contractual obligations of Parent to
repurchase, redeem or otherwise acquire any capital stock of Parent. Except as
set forth in Section 4.2(a) of the Parent Disclosure Schedule, here are no
stockholder agreements, voting trusts or other agreements or understandings to
which Parent is a party or by which it is bound relating to the voting of any
shares of capital stock of Parent.
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(b) All of the outstanding capital stock of the Merger Subsidiary is owned
by Parent free and clear of any Lien or any other limitation or restriction
(including any restriction on the right to vote or sell the same, except as may
be provided as a matter of Law). There are no securities of Parent or its
subsidiaries convertible into or exchangeable for, no options or other rights to
acquire from Parent or its subsidiaries, and no other contract, understanding,
arrangement or obligation (whether or not contingent) providing for the issuance
or sale, directly or indirectly, of any capital stock or other ownership
interests in, or any other securities of, Merger Subsidiary. There are no
outstanding contractual obligations of Parent or Merger Subsidiary to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other ownership interests in Merger Subsidiary.
SECTION 4.3 Authority Relative to This Agreement.
(a) Each of Parent and the Merger Subsidiary has all necessary corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. No other corporate proceedings on the part of
Parent or the Merger Subsidiary are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby (other than, with respect to the
Parent Requisite Vote (as hereinafter defined)). This Agreement has been duly
and validly executed and delivered by each of Parent and the Merger Subsidiary
and, assuming the due authorization, execution and delivery hereof by Fusion,
constitutes a valid, legal and binding agreement of each of Parent and the
Merger Subsidiary, enforceable against each of Parent and the Merger Subsidiary
in accordance with its terms.
(b) The Boards of Directors of Parent (the "Parent Board") and Merger
Subsidiary, and the Parent as the sole stockholder of the Merger Subsidiary,
have duly and validly authorized the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, and taken all
corporate actions required to be taken by such Boards of Directors and Parent as
the sole stockholder of the Merger Subsidiary for the consummation of the
transactions. The affirmative approval of the holders of Parent Common Stock
representing a majority vote of stockholders present at the Parent Stockholders
Meeting (as hereinafter defined) (the "Parent Requisite Vote") is the only vote
of the holders of any class or series of capital stock of Parent necessary to
approve the items anticipated to be submitted for approval at the Parent
Shareholder Meeting (as hereinafter defined).
SECTION 4.4 SEC Reports; Financial Statements. Parent, including for
purposes of this Section 4.4 IDM, has filed all required forms, reports and
documents with the SEC since January 1, 1998, each of which has complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act, each as in effect on the dates such forms, reports and documents
were filed. Parent has heretofore provided to Fusion, and the stockholders of
Fusion, access to all reports, proxy statements and other filings with the SEC
(including any amendments thereto)(the "Parent SEC Reports"). None of such
forms, reports or documents, including, without limitation, any financial
statements or schedules included or incorporated by reference therein,
contained, when filed, any untrue statement of a material fact or omitted to
state a material fact required to be stated or incorporated by reference therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements included in the Parent SEC Reports complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto and fairly present, in
conformity with GAAP on a consistent basis (except as may be indicated in the
notes thereto), the consolidated financial position of Parent and its
consolidated subsidiaries as of the dates thereof and their consolidated results
of operations and changes in financial position for the periods then ended
(subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments). Since January 1, 1999, there has not been any change, or
any application or request for any change, by Parent or any of its subsidiaries
in accounting principles, methods or policies for financial accounting or Tax
purposes.
SECTION 4.5 No Undisclosed Liabilities. Neither the Parent nor the Merger
Subsidiary has any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and there is no existing condition, situation
or set of circumstances known to Parent which could be expected to result in
such a liability or obligation, except (a) liabilities or obligations reflected
in the Parent SEC Reports filed prior to the date hereof, (b) liabilities or
obligations incurred in the ordinary course of business which do not and would
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Parent and (c) liabilities or obligations incurred in
connection with the transactions contemplated hereby.
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SECTION 4.6 Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports filed prior to the date hereof or as set forth in Section
4.6 of the Parent Disclosure Schedule, since March 31, 1999 (a) the businesses
of the Parent and the Merger Subsidiary have been conducted in the ordinary
course consistent with past practice, and (b) there has not been any event,
change, occurrence or development that has had, or is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on the Parent or
Merger Subsidiary.
SECTION 4.7 Information Supplied. None of the information supplied or to be
supplied by Parent or the Merger Subsidiary for inclusion or incorporation by
reference in the Proxy Statement will, at the date mailed to stockholders and at
the time of the Parent Stockholder Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Parent Stockholder Meeting any event with respect to Parent, its officers
and directors or any of its subsidiaries should occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement, Parent
shall promptly so advise Fusion and such event shall be so described, and such
amendment or supplement (which Fusion shall have a reasonable opportunity to
review) shall be promptly filed with the SEC and, as required by Law,
disseminated to the stockholders of Parent. The Proxy Statement will comply as
to form in all material respects with the provisions of the Exchange Act and the
respective rules and regulations thereunder.
SECTION 4.8 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, state
securities or blue sky Laws, the filing and recordation of certificates of
merger as required by the DGCL and as otherwise set forth in Section 4.8 to the
Parent Disclosure Schedule (the "Parent Required Approvals"), no filing with or
notice to, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution and delivery by Parent or the
Merger Subsidiary of this Agreement or the consummation by Parent or the Merger
Subsidiary of the transactions contemplated hereby, except where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings or give such notice do not or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent. Neither
the execution, delivery and performance of this Agreement by Parent or the
Merger Subsidiary nor the consummation by Parent or the Merger Subsidiary of the
transactions contemplated hereby will (i) conflict with or result in any breach
of any provision of the respective articles of incorporation or bylaws (or
similar governing documents) of Parent or the Merger Subsidiary or any of
Parent's subsidiaries, (ii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration or Lien)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which Parent or the Merger Subsidiary or any of Parent's subsidiaries is a
party or by which any of them or any of their respective properties or assets
may be bound (collectively, the "Parent and Merger Subsidiary Agreements") or
(iii) violate any Law applicable to Parent or the Merger Subsidiary or any of
Parent's subsidiaries or any of their respective properties or assets, except in
the case of (ii) or (iii) for violations, breaches or defaults which do not or
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Parent. Section 4.8 of the Parent Disclosure Schedule
sets forth a list of all material third party consents and approvals required to
be obtained under the Parent and Merger Subsidiary Agreements prior to the
consummation of the transactions contemplated by this Agreement.
SECTION 4.9 Litigation. Except as and to the extent disclosed in Section
4.9 of the Parent Company Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation pending or, to the Parent's knowledge, threatened
against the Parent or the Merger Subsidiary or any of their respective
properties or assets which (a) does or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Parent or (b)
as of the date hereof, questions the validity of this Agreement or any action to
be taken by the Parent in connection with the consummation of the transactions
contemplated hereby or could otherwise prevent or delay the consummation of the
transactions contemplated by this Agreement. Except as and to the extent
publicly disclosed by the Parent in Section 4.9 of the Parent Disclosure
Schedule, there is no judgment, order, writ, injunction or decree outstanding
against the Parent or the Merger Subsidiary which does or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
the Parent or the Merger Subsidiary.
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SECTION 4.10 Compliance with Applicable Laws. Except as and to the extent
publicly disclosed by Parent in the Parent SEC Reports filed prior to the date
hereof, the businesses of Parent and the Merger subsidiary are not being
conducted in violation of any Law, ordinance or regulation of any Governmental
Entity, except for violations or possible violations which do not and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent. To Parent's knowledge, no investigation or review by
any Governmental Entity with respect to Parent or the Merger subsidiary is
pending or threatened, nor, to Parent's knowledge, has any Governmental Entity
indicated an intention to conduct the same, other than, in each case, those
which Parent reasonably believes do not or would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Parent or
the Merger Subsidiary.
SECTION 4.11 Absence of Questionable Payments. Neither Parent nor the
Merger Subsidiary nor, to Parent's knowledge, any director, officer, agent,
employee or other person acting on behalf of Parent or the Merger Subsidiary,
has used any corporate or other funds for unlawful contributions, payments,
gifts, or entertainment, or made any unlawful expenditures relating to political
activity to government officials or others or established or maintained any
unlawful or unrecorded funds in violation of Section 30A of the Exchange Act.
Neither Parent nor the Merger Subsidiary nor, to Parent's knowledge, any
director, officer, agent, employee or other person acting on behalf of Parent or
the Merger Subsidiary, has accepted or received any unlawful contributions,
payments, gifts, or expenditures.
SECTION 4.12 Employee Plans. Except as and to the extent disclosed in
Section 4.12 of the Parent Disclosure Schedule there are no "employee benefit
plans," as defined in Section 3(3) of ERISA, employment, executive compensation,
consulting or other compensation agreements, and stock option, stock award,
stock purchase or other equity-based compensation, deferred compensation,
severance, salary continuation, life insurance, bonus or other incentive
compensation programs or arrangements, and directors' benefit, bonus or other
incentive compensation arrangements, for which the Parent or the Merger
Subsidiary has any obligation to or liability, contingent or otherwise.
SECTION 4.13 Material Contracts.
(a) Section 4.13 of the Parent Disclosure Schedule sets forth a list of all
Material Contracts (as hereinafter defined). The Parent has heretofore made
available to Fusion true, correct and complete copies of all written or oral
contracts and agreements (and all material amendments, modifications and
supplements thereto and all side letters to which Parent or the Merger
Subsidiary is a party materially affecting the obligations of any party
thereunder) to which the Parent or the Merger Subsidiary is a party or by which
any of its properties or assets are bound that are material to the business,
properties or assets of the Parent and the Merger Subsidiary taken as a whole,
including, without limitation, all: (i) employment, severance, personal services
or consulting contracts (other than any such contracts that are terminable
without penalty upon not more than 90 days notice), and all non-competition or
indemnification contracts with current or former directors, officers or
employees of the Parent or the Merger Subsidiary (including, without limitation,
any contract to which Parent or the Merger Subsidiary is a party involving
employees of the Parent); (ii) material license agreements relating to
Intellectual Property granting to the Parent a license to practice technology
used in the conduct of its current or planned operations; (iii) contracts
granting a right of first refusal or first negotiation for essential properties,
services or supplies, or material sales not in the ordinary course; (iv)
partnership or joint venture agreements; (v) agreements for the acquisition,
sale or lease (including leases in connection with financing transactions) of
any properties or assets of the Parent with a value in excess of $5,000 (by
merger, purchase or sale of assets or stock or otherwise) entered into since
March 31, 1999; (vi) material contracts or agreements with any Governmental
Entity; (vii) loan or credit agreements, mortgages, indentures or other
agreements or instruments evidencing (A) indebtedness for borrowed money by the
Parent or the Merger Subsidiary or any such agreement pursuant to which
indebtedness for borrowed money may be incurred (including guaranties) or (B)
Liens securing any such indebtedness; (viii) agreements that purport to limit,
curtail or restrict the ability of the Parent or the Merger Subsidiary, or would
restrict the ability of Parent or the Merger Subsidiary, to compete in any
geographic area or line of business; (ix) agreements or arrangements, including
but not limited to hedges, options, swaps, caps and collars, designed to protect
the Parent or the Merger Subsidiary against fluctuations in interest rates,
currency exchange rates or the prices of certain commodities and raw materials;
and (x) commitments and agreements to enter into any of the foregoing
(collectively, together with any such contracts entered into in accordance with
Section 5.1 hereof, the "Material Contracts"). Except as set forth in Section
4.13 of the Parent Disclosure Schedule, neither the Parent nor the Merger
Subsidiary is a party to or bound by any severance or other agreement with any
employee or consultant pursuant to which such person would be entitled to
receive any additional compensation or an accelerated payment of compensation as
a result of (x) the consummation of the transactions contemplated hereby or (y)
the termination of such employment or consulting following such consummation.
(b) Each of the Material Contracts is in full force and effect. There is no
breach or default under any Material Contract either by the Parent or, to the
Parent's knowledge, by any other party thereto, and no event has occurred that
with the lapse of time or the giving of notice or both would constitute a breach
or default thereunder by the Parent or, to the Parent's knowledge, any other
party, except for any such breach or default as does not or would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on the Parent.
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(c) No party to any such Material Contract has given notice to the Parent
of or made a claim against the Parent with respect to any breach or default
thereunder, except for any such breach or default as does not or would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Parent.
SECTION 4.14 Year 2000. Parent and its subsidiaries have developed and are
executing a plan with respect to Year 2000 readiness (the "Parent Year 2000
Plan").The Parent Year 2000 Plan addresses the Year 2000 issues which, to the
knowledge of Parent, are material to Parent and its subsidiaries, including
internal information systems and process control risks, embedded circuitry risks
and third party risks.
SECTION 4.15 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by and
on behalf of Parent or the Merger Subsidiary or any of their affiliates.
SECTION 4.16 Tax Treatment. Neither Parent nor any of its affiliates has
taken or agreed to take any action or is aware of any fact or circumstance that
would prevent the Merger from qualifying as a reorganization under Section 368
of the Code.
ARTICLE V
COVENANTS RELATED TO CONDUCT OF BUSINESS
SECTION 5.1 Conduct of Business of Fusion. Except as contemplated by this
Agreement, during the period from the date hereof to the Effective Time, Fusion
will, and will cause each of its subsidiaries to, conduct its operations in the
ordinary and usual course of business consistent with the Business Plan and, to
the extent consistent therewith, with no less diligence and effort than would be
applied in the absence of this Agreement, seek to preserve intact its current
business organizations, seek to keep available the service of its current
officers and employees and seek to preserve its relationships with customers,
suppliers and others having business dealings with it to the end that goodwill
and ongoing businesses shall be unimpaired at the Effective Time. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement or in Section 5.1 of the Fusion Disclosure Schedule,
prior to the Effective Time, neither Fusion nor any of its subsidiaries will,
without the prior written consent of Parent:
(a) amend its certificate of incorporation or bylaws (or other similar
governing instrument);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities convertible into or exchangeable for any
stock or any equity equivalents (including, without limitation, any stock
options or stock appreciation rights); provided, however, that it is
specifically contemplated by the Business Plan, and Fusion is authorized
hereunder, to issue, sell, deliver or agree or commit to issue, sell or deliver,
shares of its common stock or securities convertible into or exchangeable for
common stock of Fusion, as deemed appropriate by management of Fusion to carry
out Fusion's Business Plan and provided that Fusion will notify management of
Parent prior to any such issuance or commitment to issue securities;
(c) (i) split, combine or reclassify any shares of its capital stock; (ii)
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(iii) make any other actual, constructive or deemed distribution in respect of
any shares of its capital stock or otherwise make any payments to stockholders
in their capacity as such; or (iv) redeem, repurchase or otherwise acquire any
of its securities or any securities of any of its subsidiaries;
(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of Fusion
or any of its subsidiaries (other than the Merger);
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(e) alter through merger, liquidation, reorganization, restructuring or in
any other fashion the corporate structure or ownership of any subsidiary;
(f) (i) incur or assume any long-term or short-term debt or issue any debt
securities, except for borrowings under existing lines of credit in the ordinary
and usual course of business consistent with past practice (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person, except in
the ordinary and usual course of business consistent with the Business Plan and
in amounts not material to Fusion and its subsidiaries, taken as a whole, and
except for obligations of the wholly owned subsidiaries of Fusion; (iii) make
any loans, advances or capital contributions to, or investments in, any other
person (other than to the wholly owned subsidiaries of Fusion or customary loans
or advances to employees in the ordinary and usual course of business consistent
with the Business Plan and in amounts not material to the maker of such loan or
advance); (iv) pledge or otherwise encumber shares of capital stock of Fusion or
its subsidiaries; or (v) mortgage or pledge any of its material assets, tangible
or intangible, or create or suffer to be created any material Lien thereupon;
(g) except as may be required by Law, enter into, adopt, amend, extend or
terminate any bonus, profit sharing, compensation, severance, termination, stock
option, stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, labor, collective bargaining, employment, severance or other
employee benefit agreement, trust, plan, fund, award or other arrangement for
the benefit or welfare of any director, officer or employee in any manner, or
increase in any manner the compensation or fringe benefits of any director,
officer or (except as required under agreements existing on the date hereof and
except for increases in compensation, bonus or other benefits payable to
employees of Fusion or any of its subsidiaries in the ordinary and usual course
of business consistent with the Business Plan) employee or pay any benefit not
required by any plan and arrangement as in effect as of the date hereof
(including, without limitation, the granting of stock appreciation rights or
performance units);
(h) acquire, sell, lease or dispose of any assets outside the ordinary and
usual course of business consistent with the Business Plan or any assets which
in the aggregate are material to Fusion and its subsidiaries taken as a whole,
enter into any commitment or transaction outside the ordinary and usual course
of business consistent with the Business Plan or grant any exclusive
distribution rights;
(i) except as may be required as a result of a change in Law or in GAAP,
change any of the accounting principles or practices used by it;
(j) revalue in any material respect any of its assets, including, without
limitation, writing down the value of inventory or writing-off notes or accounts
receivable other than in the ordinary and usual course of business consistent
with Business Plan or as required by GAAP;
(k) acquire (by merger, consolidation, or acquisition of stock or assets)
any corporation, partnership or other business organization or division thereof
or any equity interest therein; (ii) enter into any material contract or
agreement, other than in the ordinary and usual course of business consistent
with the Business Plan or amend in any material respect any of the Material
Contracts or the agreements referred to in Section 3.18; or (iii) enter into or
amend any contract, agreement, commitment or arrangement providing for the
taking of any action that would be prohibited hereunder;
(l) make or revoke any Tax election, or settle or compromise any Tax
liability in excess of amounts reserved therefor on the consolidated balance
sheet of Fusion as at the Audit Date, or change (or make a request to any Taxing
authority to change) any aspect of its method of accounting for Tax purposes;
(m) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
and usual course of business consistent with the Business Plan;
(n) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which Fusion or any of its
subsidiaries is a party;
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(o) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby;
(p) take any action (including any action otherwise permitted by this
Section 5.1) that would prevent or impede the Merger from qualifying as a
reorganization under Section 368(a) of the Code;
(q) enter into any agreement or arrangement that limits or otherwise
restricts Fusion or any of its subsidiaries or any successor thereto or that
could, after the Effective Time, limit or restrict the Surviving Corporation and
its affiliates (including Parent) or any successor thereto, from engaging or
competing in any line of business or in any geographic area;
(r) take, propose to take, or agree in writing or otherwise to take, any of
the actions described in Sections 5.1(a) through 5.1(q) or any action which
would (y) make any of the representations or warranties of Fusion contained in
this Agreement (i) which are qualified as to materiality untrue or incorrect or
(ii) which are not so qualified untrue or incorrect in any material respect or
(z) result in any of the conditions to the Merger set forth in Article VII
hereof not being satisfied.
SECTION 5.2 Conduct of Business of Parent and IDM. Except as otherwise
expressly provided in this Agreement or as set forth in Section 5.2 of the
Parent Disclosure Schedule, prior to the Effective Time, neither Parent, nor IDM
nor the Merger Subsidiary will, without the prior written consent of Fusion:
(a) amend its certificate of incorporation (or other similar governing
instrument) in any manner that would be materially adverse to the holders of
Parent Common Stock;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities convertible into or exchangeable for any
stock or any equity equivalents (including, without limitation, any stock
options or stock appreciation rights);
(c) (i) declare, set aside or pay any dividend or other distribution in
respect of its capital stock, (ii) make any other actual, constructive or deemed
distribution in respect of any shares of its capital stock or otherwise make any
payments to stockholders in their capacity as such or (iii) redeem, repurchase
or otherwise acquire any shares of Parent Common Stock;
(d) take any action (including any action otherwise permitted by this
Section 5.2) that would prevent or impede the Merger from qualifying as a
reorganization under Section 368(a) of the Code; or
(e) take, propose to take, or agree in writing or otherwise to take, any of
the actions described in Section 2.1(e) or Sections 5.2(a) through 5.2(d) or any
action which (y) would make the representations or warranties of Parent and the
Merger Subsidiary in this Agreement (i) which are qualified as to materiality
untrue or incorrect or (ii) which are not so qualified untrue in any material
respect or (z) result in any of the conditions to the Merger set forth in
Article VII hereof not being satisfied.
SECTION 5.3 Access to Information.
(a) Between the date hereof and the Effective Time, Fusion will give Parent
and the Merger Subsidiary and their authorized representatives (including
counsel, financial advisors and auditors) reasonable access during normal
business hours to all employees, offices and other facilities and to all books
and records of Fusion and its subsidiaries, will permit Parent and the Merger
Subsidiary to make such inspections as Parent and the Merger Subsidiary may
reasonably require and will cause Fusion's officers and those of its
subsidiaries to furnish Parent with such financial and operating data and other
information with respect to the business, properties and personnel of Fusion and
its subsidiaries as Parent or the Merger Subsidiary may from time to time
reasonably request, provided that no investigation pursuant to this Section
5.3(a) shall affect or be deemed to modify any of the representations or
warranties made by Fusion in this Agreement.
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(b) Between the date hereof and the Effective Time, Parent and the Merger
Subsidiary will give Fusion and its authorized representatives (including
counsel, financial advisors and auditors) reasonable access during normal
business hours to all employees, plants, offices, warehouses and other
facilities and to all books and records of Parent and its subsidiaries, will
permit Fusion to make such inspections as Fusion may reasonably require and will
cause Parent's officers and those of its subsidiaries to furnish Fusion with
such financial and operating data and other information with respect to the
business, properties and personnel of Parent and its subsidiaries as Fusion may
from time to time reasonably request, provided that no investigation pursuant to
this Section 5.3(b) shall affect or be deemed to modify any of the
representations or warranties made by Parent or the Merger Subsidiary in this
Agreement.
(c) Between the date hereof and the Effective Time, Fusion shall furnish to
Parent and the Merger Subsidiary, concurrently with the deliveries thereof to
management or Fusion Board, such monthly financial statements and data as are
regularly prepared for distribution to Fusion management or the Fusion Board.
(d) Until the Effective Time, each of Parent and the Merger Subsidiary will
hold and will cause its authorized representatives to hold in confidence all
documents and information concerning Fusion and its subsidiaries furnished to
Parent or the Merger Subsidiary in connection with the transactions contemplated
by this Agreement except to the extent such documents and information are
required to be disclosed by Law, including disclosure required by federal and
state securities laws.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 Stockholder Meetings.
(a) Fusion shall take all lawful action to (i) cause the stockholders of
Fusion to execute a unanimous consent approving the terms of this Agreement, or
(ii) cause a special meeting of its stockholders (the "Fusion Stockholder
Meeting") to be duly called and held as soon as practicable after the date of
this Agreement for the purpose of voting on the approval and adoption of this
Agreement and (iii) solicit proxies from its stockholders to obtain the Fusion
Requisite Vote for the approval and adoption of this Agreement. The Fusion Board
shall recommend approval and adoption of this Agreement and the Merger by
Fusion's stockholders and the Fusion Board shall not withdraw, amend or modify
in a manner adverse to Parent such recommendation (or announce publicly its
intention to do so).
(b) Parent, as sole stockholder of Merger Subsidiary, shall execute a
written consent or otherwise take such steps as may be necessary to satisfy
applicable stockholder approval requirements relating to the Merger.
(c) Parent and IDM shall take all lawful action to (i) cause a special
meeting of the stockholders of IDM (the "Parent Stockholder Meeting") to be duly
called and held as soon as practicable after the date of this Agreement for the
purpose of voting on the approval of the Action Items (as defined in Section 6.4
below) and (ii) solicit proxies from IDM's stockholders to obtain the Parent
Requisite Vote. IDM's Board shall recommend approval of the Action Items by
IDM's stockholders and, except as required to comply with their fiduciary duty
under applicable Law, IDM's Board shall not be permitted to withdraw, amend or
modify in a manner adverse to Fusion such recommendation (or announce publicly
its intention to do so).
SECTION 6.2 Registration of Securities to be Issued.
(a) As soon as practicable after the date hereof, Parent shall file with
the Securities and Exchange Commission a registration statement (the
"Registration Statement") on Form S-4, or such other form as may be appropriate
for the purpose of registering the Parent Common Stock to be issued to the
Fusion shareholders pursuant to the Merger and seeking proxies in connection
with the vote of the stockholders of the Parent with respect to the Action
Items. Parent shall use all reasonable efforts to cause the Registration
Statement to become effective as soon as possible. Prior to filing, Parent shall
consult with Fusion and provide Fusion with a full opportunity to review and
comment on all portions of the Prospectus/Proxy Statement and Registration
Statement. Fusion shall cooperate with Parent and its counsel in the preparation
of the Registration Statement and shall provide all information and documents
reasonably requested, including financial statements as shall be required, in
connection with preparation of such Registration Statement. (b) If, and to the
extent necessary to facilitate the resale of shares received in the Merger free
of the limitations of Rule 144 or Rule 145, Parent shall file with the SEC an
additional registration statement (the "Resale Registration Statement") on Form
S-3, or such other form as may be appropriate, for the purpose of registering
the resale by non-management shareholders of Fusion of up to 7,300,000 shares of
Parent Common Stock to be issued in the Merger. Parent shall use all reasonable
efforts to cause the Resale Registration Statement to become effective as soon
as possible following the Effective Time. Fusion shall provide a list of selling
shareholders who desire to have shares included in the Resale Registration
Statement and Fusion, and such selling shareholders, shall cooperate fully with
Parent and its counsel in the preparation of the Resale Registration Statement.
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SECTION 6.3 Reasonable Best Efforts. Subject to the terms and conditions of
this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable Laws to consummate the Merger
and the other transactions contemplated by this Agreement.
SECTION 6.4 Action Items. The Parent's Board and IDM's board shall approve,
and submit to IDM's stockholders for approval, a single proposal to (i) approve
the terms of the Merger; (ii) approve the terms of the IDM Reorganization; (iii)
amend the Parent Certificate of Incorporation to increase the authorized shares
of Common Stock of the Parent to 100,000,000 shares; (iv) amend the Parent
Certificate of Incorporation to decrease the par value of the Parent Common
Stock to $0.001 per share; (v) amend the Parent Certificate of Incorporation to
change the name of the Parent to a name to be determined by the Parent Board
after consultation with management of Fusion; (vi) approve, a proposal, as
previously approved by the Parent's Board, to increase the number of shares
reserved for issuance pursuant to Parent's 1998 Plan by 1,600,000 shares
(collectively, the foregoing items (i) through (vi) submitted for approval at
the Parent Stockholder Meeting are referred to as the "Action Items") and (vii)
carry out such other matters as management of Parent shall reasonably deem
necessary. The Action Items shall be voted on, and approved or rejected, by the
Parent stockholders as a single proposal and not individually. Joel Freedman and
Frank Falco, as the principal officers and shareholders of Parent, agree to vote
for the Action Items at the Parent Stockholder Meeting.
SECTION 6.5. Grants of Options. Parent's Board is specifically authorized
under this Merger Agreement to grant additional options in an aggregate amount
up to the total shares reserved for issuance under Parent's 1993 Plan, 1995 Plan
and 1998 Plan, as increased.
SECTION 6.6. Parent Directors. On, or as soon as practical following, the
Effective Time, Parent shall decrease the size of its board of directors to five
persons with three of such directors to be designated by Fusion and two of such
directors to be designated by IDM.
SECTION 6.7. Undertakings of Fusion and Parent Relating to IDM. Parent and
Fusion agree: (i) to guarantee, for a period of three years following the
Effective Time, the salary of Joel Freedman and Frank Falco, pursuant to their
existing employment agreements with IDM, in the amount of $50,000 per year each;
(ii) to cause fifty percent (50%) of all proceeds received from the conversion
or exercise of options or warrants of IDM or Parent outstanding on the Effective
Time to be contributed to the capital of IDM and fifty percent (50%) of such
proceeds to be contributed to the capital of Fusion; and (iii) to nominate and
recommend the election of Joel Freedman and Frank Falco to the board of Parent
for a minimum of five years following the Parent Stockholder Meeting.
SECTION 6.8. Approval of Issuances of Shares in Payment of Expenses. The
Parent's Board is hereby authorized under this Merger Agreement to issue up to
350,000 shares of Parent Common Stock, currently reserved for issuance, in
payment of certain amounts owed by IDM to consultants and service providers.
SECTION 6.9 No Solicitation; Acquisition Proposals. From the date hereof
until the termination hereof, and except as expressly permitted by the following
provisions of this Section 6.9, Fusion will not, nor will it permit any of its
subsidiaries to, nor will it authorize or permit any officer, director or
employee of or any investment banker, attorney, accountant or other advisor or
representative of, Fusion or any of its subsidiaries to, directly or indirectly,
(i) solicit, initiate or encourage the submission of any Acquisition Proposal
(as defined in Section 9.12(a)), (ii) participate in any discussions or
negotiations regarding, or furnish to any person any non-public information with
respect to Fusion or any of its subsidiaries, or take any other action to
facilitate, any Acquisition Proposal or any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal or (iii) enter into any agreement with respect to an
Acquisition Proposal. SECTION 6.10 Public Announcements. Each of Parent, the
Merger Subsidiary and Fusion will consult with one another before issuing any
press release or otherwise making any public statements with respect to the
transactions contemplated by this Agreement, including, without limitation, the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
Law or by obligations pursuant to any listing agreement with the Nasdaq SmallCap
Market, as determined by Parent, the Merger Subsidiary or Fusion, as the case
may be.
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SECTION 6.11 Notification of Certain Matters. Fusion shall, upon obtaining
knowledge of any of the following, give prompt notice to Parent and the Merger
Subsidiary, and Parent and the Merger Subsidiary shall, upon obtaining knowledge
of any of the following, give prompt notice to Fusion, of (i) the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty contained in this Agreement,
which is qualified as to materiality, to be untrue or inaccurate, or any
representation or warranty not so qualified, to be untrue or inaccurate in any
material respect at or prior to the Effective Time, (ii) any material failure of
Fusion, Parent or the Merger Subsidiary, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder, (iii) the occurrence or non-occurrence of any event the occurrence
or non-occurrence of which would be likely to cause any condition to the
obligations of any party to the effect of the transactions contemplated hereby
not to be satisfied, (iv) any notice of, or other communication relating to, a
default or event which, with notice or lapse of time or both, would become a
default, received by it or any of its subsidiaries subsequent to the date of
this Agreement and prior to the Effective Time, under any contract or agreement
material to the financial condition, properties, businesses, results of
operations or prospects of it and its subsidiaries taken as a whole to which it
or any of its subsidiaries is a party or is subject, (v) any notice or other
communication from any Governmental Entity in connection with the Merger, (vi)
any actions, suits, claims, investigations or other proceedings (or
communications indicating that the same may be contemplated) commenced or
threatened against Fusion or any of its subsidiaries which, if pending on the
date of this Agreement, would have been required to have been disclosed pursuant
to Section 3.12 or which relate to the consummation of the Merger, (vii) any
notice or other communication from any third party alleging that the consent of
such third party is or may be required in connection with the transactions
contemplated by this Agreement, or (viii) any Material Adverse Effect in their
respective financial condition, properties, businesses, results of operations or
prospects, taken as a whole; provided, however, that the delivery of any notice
pursuant to this Section 6.13 shall not cure such breach or non-compliance or
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 6.11 Tax-Free Reorganization Treatment. Fusion, Parent and the
Merger Subsidiary shall execute and deliver to Friedman Siegelbaum LLP, special
tax counsel to the Parent, certificates substantially in the forms agreed to on
or prior to the date hereof at such time or times as reasonably requested by
such law firm in connection with the delivery of an opinion with respect to the
transactions contemplated hereby. Prior to the Effective Time, none of Fusion,
Parent or the Merger Subsidiary shall take or cause to be taken any action which
would cause to be untrue (or fail to take or cause not to be taken any action
which would cause to be untrue) any of the representations in such certificates.
SECTION 6.12 Employee Matters. Parent will cause the Surviving Corporation
to honor the obligations of Fusion or any of its subsidiaries under the
provisions of all employment, consulting, termination, severance, change in
control and indemnification agreements disclosed in Section 6.12 of Fusion
Disclosure Schedule between and among Fusion or any of its subsidiaries and any
current or former officer, director, consultant or employee of Fusion or any of
its subsidiaries.
SECTION 6.13 SEC Filings. Parent shall furnish to Fusion copies of all
reports, proxy statements and prospectuses of the type referred to in Section
4.4 which it files with the SEC on or after the date hereof, and Parent
represents and warrants that as of the respective dates thereof, such reports
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and the unaudited
consolidated interim financial statements included in such reports (including
any related notes and schedules) will fairly present the financial position of
Parent and its consolidated Subsidiaries as of the dates thereof and the results
of operations and cash flows or other information included therein for the
periods or as of the date then ended (subject, in the case of the interim
financial statements, to normal, recurring year-end adjustments), in each case
in accordance with past practice and GAAP consistently applied during the
periods involved (except as otherwise disclosed in the notes thereto).
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SECTION 6.14 Listing of Stock. Parent shall use its best efforts to cause
the shares of Parent Common Stock to be issued in connection with the Merger to
be approved for listing on the Nasdaq SmallCap Market on or prior to the Closing
Date, subject to official notice of issuance.
SECTION 6.15 Antitakeover Statutes. If any Takeover Statute is or may
become applicable to the Merger, each of Parent and Fusion shall take such
actions as are necessary so that the transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated hereby
and otherwise act to eliminate or minimize the effects of any Takeover Statute
on the Merger.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 Conditions to Each Party's Obligations to Effect the Merger.
The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of which may be
waived in whole or in part by the party being benefitted thereby, to the extent
permitted by applicable Law:
(a) This Agreement shall have been approved and adopted by the unanimous
vote of the stockholders of Fusion and the Merger Subsidiary and the Action
Items shall have been approved by the stockholders of IDM;
(b) There shall not be in effect any Law of any Governmental Entity of
competent jurisdiction, restraining, enjoining or otherwise preventing
consummation of the transactions contemplated by this Agreement or permitting
such consummation only subject to any condition or restriction that has or would
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Fusion or Parent and no Governmental Entity shall have
instituted any proceeding which continues to be pending seeking any such Law;
and
(c) All necessary approvals under state securities Laws or the Securities
Act or Exchange Act relating to the issuance or trading of the Parent Common
Stock shall have been received.
SECTION 7.2 Conditions to the Obligations of the Parent and the Merger
Subsidiary. The respective obligations of Parent and the Merger Subsidiary to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Effective Time of each of the following
additional conditions, any or all of which may be waived in whole or part by
Parent and the Merger Subsidiary, as the case may be, to the extent permitted by
applicable Law:
(a) The representations and warranties of Fusion contained herein or
otherwise required to be made after the date hereof in a writing expressly
referred to herein by or on behalf of Fusion pursuant to this Agreement, to the
extent qualified by materiality or Material Adverse Effect, shall have been true
and, to the extent not qualified by materiality or Material Adverse Effect,
shall have been true in all material respects, in each case when made and on and
as of the Closing Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which need be true,
or true in all material respects, as the case may be, only as of the specified
date).
(b) Fusion shall have performed or complied in all material respects with
all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of the Closing.
(c) Fusion shall have delivered to Parent a certificate, dated the date of
the Closing, signed by the President or any Vice President of Fusion (but
without personal liability thereto), certifying as to the fulfillment of the
conditions specified in Sections 7.2(a) and 7.2(b).
(d) Parent shall have received an opinion of Friedman Siegelbaum LLP, dated
the Effective Time, based on the representations of Parent, the Merger
Subsidiary and Fusion, referred to in Section 6.11, to the effect that the
Merger will be treated for Federal income Tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
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(e) (i) All authorizations, consents or approvals of a Governmental Entity
(other than those specified in Section 7.1(b) hereof) required in connection
with the execution and delivery of this Agreement and the performance of the
obligations hereunder shall have been made or obtained, without any limitation,
restriction or condition that has or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion or Parent,
except for such authorizations, consents or approvals, the failure of which to
have been made or obtained does not and would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Fusion or
Parent.
(ii) There shall not be pending or threatened by any Governmental Entity
any suit, action or proceeding (A) seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by this
Agreement or seeking to obtain from Fusion or Parent any damages that are
material in relation to Fusion and its subsidiaries taken as a whole or Parent
and its subsidiaries taken as a whole, as applicable, (B) seeking to (1)
prohibit or limit the ownership or operation by Fusion, Parent or any of their
respective subsidiaries of any material portion of the business or assets of
Fusion and its subsidiaries, taken as a whole, or Parent and its subsidiaries,
taken as a whole, as applicable, (2) compel Fusion, Parent or any of their
respective subsidiaries to dispose of or "hold separate" any material portion of
the business or assets of Fusion and its subsidiaries, taken as a whole, or
Parent and its subsidiaries, taken as a whole, as applicable, as a result of the
Merger or any of the other transactions contemplated by this Agreement or (3)
impose any other significant restrictions upon, or the making of any material
accommodation (financial or otherwise) in respect of, the transactions
contemplated hereby or the conduct of the business of the Surviving Corporation
or the Parent (including any agreement not to compete in any geographic area or
line of business), (C) seeking to impose limitations on the ability of Parent to
acquire or hold, or exercise full rights of ownership of, any shares of capital
stock of Fusion or the Surviving Corporation, including the right to vote the
common stock of the Surviving Corporation, on all matters properly presented to
the stockholders of the Surviving Corporation, (D) seeking to prohibit Parent
and its subsidiaries from effectively controlling in any material respect the
business or operations of Fusion and its subsidiaries, taken as a whole, (E)
which would result in the abrogation or diminishment of any authority or license
granted by any Governmental Entity or (F) which otherwise could reasonably be
expected to have a Material Adverse Effect on Fusion or Material Adverse Effect
on Parent.
(e) Fusion shall have obtained (i) the consents and approvals set forth in
Sections 3.3 and 3.8 of the Fusion Disclosure Schedule and (ii) the consent or
approval of each person whose consent or approval shall be required under any
Material Contract, Real Property Lease or other obligation to which Fusion or
any of its subsidiaries is a party, except those for which the failure to obtain
such consents or approvals does not or would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Fusion and would
not prevent or materially impair the ability of Fusion to consummate the
transactions contemplated by this Agreement.
(f) The Board of Directors of the Parent shall have received an opinion of
Chartered Capital Advisers, Inc., dated the date of this Agreement, to the
effect that, as of such date, the terms of the Merger are fair to the Parent and
its stockholders from a financial point of view and, as of the Closing Date,
such opinion has not been withdrawn or modified in a manner adverse to Parent.
SECTION 7.3 Conditions to the Obligations of Fusion. The obligations of
Fusion to consummate the transactions contemplated by this Agreement are subject
to the fulfillment at or prior to the Effective Time of each of the following
conditions, any or all of which may be waived in whole or in part by Fusion to
the extent permitted by applicable Law:
(a) The representations and warranties of Parent and the Merger Subsidiary
contained herein or otherwise required to be made after the date hereof in a
writing expressly referred to herein by or on behalf of Parent and the Merger
Subsidiary pursuant to this Agreement, to the extent qualified by materiality or
Material Adverse Effect, shall have been true and, to the extent not qualified
by materiality or Material Adverse Effect, shall have been true in all material
respects, in each case when made and on and as of the Closing Date as though
made on and as of the Closing Date (except for representations and warranties
made as of a specified date, which need be true, or true in all material
respects, as the case may be, only as of the specified date).
(b) Parent shall have performed or complied in all material respects with
all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of the Closing.
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(c) Parent shall have delivered to Fusion a certificate, dated the date of
the Closing, signed by the President or any Vice President of Parent (but
without personal liability thereto), certifying as to the fulfillment of the
conditions specified in Section 7.3(a) and 7.3(b).
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination by Mutual Agreement. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval of the Merger by the vote referred to
in Section 7.1(a), by mutual written consent of Fusion and Parent by action of
their respective Boards of Directors.
SECTION 8.2 Termination by Either Parent or Fusion. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Parent or Fusion if:
(a) the Merger shall not have been consummated by March 31, 2000, whether
such date is before or after the date of approval of the Merger by the vote
referred to in Section 7.1(a)(the "Termination Date"); provided, however, that
if either Parent or Fusion determines that additional time is necessary in
connection with obtaining any consent, registration, approval, permit or
authorization required to be obtained from any Governmental Entity, the
Termination Date may be extended by Parent or Fusion from time to time by
written notice to the other party to a date not beyond June 30, 2000;
(b) the requisite vote of the stockholders of IDM shall not have been
obtained at the Parent Stockholder Meeting or at any adjournment or postponement
thereof;
(c) any Law permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether before
or after the approval of the Merger by the stockholders of Fusion); or
(e) any Governmental Entity shall have failed to issue an order, decree or
ruling or to take any other action which is necessary to fulfill the conditions
set forth in Sections 7.1(b), and 7.2(e), as applicable, and such denial of a
request to issue such order, decree, ruling or take such other action shall have
been final and nonappealable; provided, that the right to terminate this
Agreement pursuant to this Section 8.2 shall not be available to any party that
has breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the occurrence of the failure
of the Merger to be consummated.
SECTION 8.3 Termination by Fusion. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval of the Merger by Fusion stockholders referred to in
Section 7.1(a), by action of the Fusion Board if there is a breach by Parent or
the Merger Subsidiary of any representation, warranty, covenant or agreement
contained in this Agreement that would give rise to a failure of a condition set
forth in Section 7.3(a) or 7.3(b), which has not been cured within 15 business
days following receipt by Parent of written notice of such breach;
SECTION 8.4 Termination by Parent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval of the Merger by the Parent Requisite Vote referred to in
Section 7.1(a) if there is a breach by Fusion of any representation, warranty,
covenant or agreement contained in this Agreement that would give rise to a
failure of a condition set forth in Section 7.2(a) or 7.2(b), which has not been
cured within 15 business days following receipt by Fusion of written notice of
such breach
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SECTION 8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, this Agreement (other than this Section 8.5 and Sections 5.3(d),
6.14 and Article IX) shall become void and of no effect with no liability on the
part of any party hereto (or of any of its directors, officers, employees,
agents, legal and financial advisors or other representatives); provided,
however, except as otherwise provided in this Section 8.5, no such termination
shall relieve any party hereto of any liability or damages resulting from (i)
any willful breach of any representations or warranties contained in this
Agreement or (ii) any breach of any covenant or agreement contained in this
Agreement.
SECTION 8.6 Amendment. This Agreement may be amended by action taken by
Fusion, Parent and the Merger Subsidiary at any time before or after approval of
the Merger by the Fusion stockholders and the Parent Requisite Vote but, after
any such approval, no amendment shall be made which requires the approval of
such stockholders under applicable Law without such approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of the
parties hereto.
SECTION 8.7 Extension; Waiver. At any time prior to the Effective Time,
each party hereto (for these purposes, Parent and the Merger Subsidiary shall
together be deemed one party and Fusion shall be deemed the other party) may (i)
extend the time for the performance of any of the obligations or other acts of
the other party, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document, certificate
or writing delivered pursuant hereto, or (iii) waive compliance by the other
party with any of the agreements or conditions contained herein. Any agreement
on the part of either party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of either party hereto to assert any of its rights hereunder
shall not constitute a waiver of such rights.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants and agreements in this Agreement or in
any exhibit, schedule or instrument delivered pursuant to this Agreement shall
survive beyond the Effective Time, except for those covenants and agreements
contained herein and therein that by their terms apply or are to be performed in
whole or in part after the Effective Time and this Article IX. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 9.2 Entire Agreement; Assignment.
(a) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof.
(b) Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by operation of Law (including, but not limited to,
by merger or consolidation) or otherwise; provided, however, that Fusion may
assign, in its sole discretion, any or all of its rights, interests and
obligations under this Agreement to any direct wholly owned subsidiary of
Parent, but no such assignment shall relieve Parent or the Merger Subsidiary of
its obligations hereunder if such assignee does not perform such obligations.
Any assignment in violation of the preceding sentence shall be void. Subject to
the preceding sentence, this Agreement will be binding upon, inure to the
benefit of, and be enforceable by, the parties and their respective successors
and assigns.
SECTION 9.3 Notices. All notices, requests, instructions or other documents
to be given under this Agreement shall be in writing and shall be deemed given,
(i) five business days following sending by registered or certified mail,
postage prepaid, (ii) when sent if sent by facsimile; provided that the fax is
promptly confirmed by telephone confirmation thereof, (iii) when delivered, if
delivered personally to the intended recipient and (iv) one business day
following sending by overnight delivery via a national courier service, and in
each case, addressed to a party at the following address for such party:
B-25
<PAGE>
if to Parent or to Merger Subsidiary, to: IDM Environmental Corp.
396 Whitehead Avenue
South River, New Jersey 08882
Attn: Joel Freedman, President
Facsimile: (732) 390-9545
with a copy to: Vanderkam & Sanders
440 Louisiana, Suite 475
Houston, Texas 77002
Attn: Michael Sanders, Esq.
Facsimile: (713) 547-8910
if to Fusion, to: Fusion Networks, Inc.
8115 N. W. 29th Avenue
Miami, Florida 33122
Attn: Hernando Bahamon
Facsimile: (305) 477-6703
with a copy to: Oscar D. Folger, Esq.
Fifth Avenue - 24th Floor
New York, New York 10175
Facsimile: (212) 697-9570
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
SECTION 9.4 Governing Law. Except to the extent that Delaware Law is
mandatorily applicable to the Merger and for the rights of the shareholders of
Fusion, this Agreement shall be governed by and construed in accordance with the
Laws of the State of New York, without regard to the principles of conflicts of
Law thereof.
SECTION 9.5 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 9.6 Parties in Interest. This Agreement shall be binding upon and
except as provided in Section 6.7(c) inure solely to the benefit of each party
hereto and its successors and permitted assigns, and, except as provided in
Section 6.7(c), nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
SECTION 9.7 Indemnification. Each of Fusion, Parent and Merger Subsidiary
(each, an "Indemnitor") hereby jointly and severally agrees to indemnify the
other, and their respective officers, directors, employees, attorneys and agents
(each, an "Indemnitee") and hold them harmless against and in respect of (i) any
and all loss, liability or damage suffered or incurred by the Indemnitee by
reason of any untrue representation, breach of warranty or non-fulfillment of
any covenant by the Indemnitor; and (ii) any and all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including, without limitation, legal fees and expenses, incident to any of the
foregoing or incurred in investigating or attempting to avoid the same or to
oppose the imposition thereof, or in enforcing this indemnity.
SECTION 9.8 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
B-26
<PAGE>
SECTION 9.9 Specific Performance. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the Southern District of the State of New York or in New York state
court, this being in addition to any other remedy to which they are entitled at
Law or in equity. In addition, each of the parties hereto (a) consents to submit
itself to the personal jurisdiction of the courts of the United States for the
Southern District of New York or any New York state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated
hereby, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (c)
agrees that it will not bring any action relating to this Agreement or any of
the transactions contemplated hereby in any other court.
SECTION 9.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 9.11 Interpretation.
(a) The words "hereof," "herein" and "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit and schedule references are to the articles,
sections, paragraphs, exhibits and schedules of this Agreement unless otherwise
specified. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." All terms defined in this Agreement shall have the defined meanings
contained herein when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such terms. Any agreement, instrument or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such agreement, instrument or statute as from time to time, amended, qualified
or supplemented, including (in the case of agreements and instruments) by waiver
or consent and (in the case of statutes) by succession of comparable successor
statutes and all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
(b) The phrases "the date of this Agreement," "the date hereof" and terms
of similar import, unless the context otherwise requires, shall be deemed to
refer to August 18, 1999. The phrase "made available" in this agreement shall
mean that the information referred to has been actually delivered to the party
to whom such information is to be made available.
(c) The parties have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
SECTION 9.12 Definitions.
(a) "Acquisition Proposal" means an inquiry, offer or proposal regarding
any of the following (other than the transactions contemplated by this
Agreement) involving Fusion: (i) any merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction; (ii) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition of all or
substantially all the assets of Fusion and its subsidiaries, taken as a whole,
in a single transaction or series of related transactions; (iii) any tender
offer or exchange offer for 20 percent or more of the outstanding Shares or the
filing of a registration statement under the Securities Act in connection
therewith; or (iv) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
(b) "beneficial ownership" or "beneficially own" shall have the meaning
provided in Section 13(d) of the Exchange Act and the rules and regulations
thereunder.
B-27
<PAGE>
(c) "know" or "knowledge" means, with respect to any party, the knowledge
of such party's executive officers after due inquiry, including inquiry of such
party's counsel and other officers or employees of such party responsible for
the relevant matter.
(d) "Material Adverse Effect" means with respect to any entity, any change,
circumstance or effect that, individually or in the aggregate with all other
changes, circumstances and effects, is or is reasonably likely to be materially
adverse to (i) the assets, properties, business, condition (financial or
otherwise) or results of operations of such entity and its subsidiaries taken as
a whole or (ii) the ability of such party to consummate the transactions
contemplated by this Agreement.
(e) "person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).
(f) "subsidiary" means, when used with reference to any entity, any
corporation or other organization, whether incorporated or unincorporated, (i)
of which such party or any other subsidiary of such party is a general or
managing partner or (ii) the outstanding voting securities or interests of,
which having by their terms ordinary voting power to elect a majority of the
Board of Directors or others performing similar functions with respect to such
corporation or other organization, is directly or indirectly owned or controlled
by such party or by any one or more of its subsidiaries.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
IDM ENVIRONMENTAL CORP. IDM/FNI ACQUISITION CORPORATION
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
------------------------ -------------------------
Name: Joel Freedman Name: Joel Freedman
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
IDM/FUSION HOLDINGS, INC FUSION NETWORKS, INC.
By: /S/ JOEL FREEDMAN By: /S/ HERNANDO BAHAMON
------------------------ --------------------------
Name: Joel Freedman Name: Hernando Bahamon
Title:President and Title:President
Chief Executive Officer
B-28
<PAGE>
APPENDIX C
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of August
31,1999 is among FUSION NETWORKS, INC., a Delaware corporation ("Fusion"), IDM
ENVIRONMENTAL CORP., a New Jersey corporation ("IDM"), IDM/FUSION HOLDINGS,
INC., a Delaware corporation ("Parent"), and IDM/FNI ACQUISITION CORPORATION, a
Delaware corporation and a direct wholly owned subsidiary of Parent (the "Merger
Subsidiary").
WHEREAS, the parties hereto entered into an Agreement and Plan of Merger
dated August 18, 1999 (the "Agreement"). Capitalized terms used and not
otherwise defined herein shall have the meaning set forth in the Agreement.
WHEREAS, the parties hereto desire to amend the Agreement in the following
respects.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follow:
1. Amendment of Section 1.6. Section 1.6 of the Agreement is hereby deleted
in its entirety and replaced with the following:
"SECTION 1.6 Directors. The directors of Fusion immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation until such director's successor is duly
elected or appointed and qualified."
2. Amendment to Section 2.1(c). Section 2.1 of the Agreement is amended to
reflect a 1,000-for-1 stock split implemented by Fusion subsequent to the date
of the Agreement and the reference appearing therein to the right to receive
"17,733.333" fully paid and non-assessable shares is hereby deleted and replaced
with "17.733."
3. Amendment to Sections 6.1(c) and 6.4. Sections 6.1(c) and 6.4 of the
Agreement are amended to add the following language at the end of those
provisions:
"Notwithstanding the requirement that IDM submit each of the Action Items
to its stockholders for approval at the Parent Stockholder Meeting, IDM, as
the sole stockholder of Parent prior to the Effective Date, may, at its
discretion, approve and carry out the Action Items referred to in Section
6.4(iii), (iv) and (v) prior to the Parent Stockholder Meeting without
submitting the same to a vote of the IDM stockholders."
4. New Section 6.16. The Agreement is amended to add new Section 6.16 which
shall read in full as follows:
"SECTION 6.16 Assumption of Warrants and Options.
(a) At the Effective Time, the Parent shall assume all obligations (a)
under the 1993 Plan, the 1995 Plan and the 1998 Plan of IDM, as described in
Section 4.2(a) (collectively, the "IDM Option Plans") and (b) under each of the
outstanding Other Derivative Securities of IDM as described in Section 4.2(a).
At the Effective Time, each outstanding option under the IDM Plans and Other
Derivative Securities to purchase shares of IDM Common Stock, whether vested or
unvested, shall be deemed to constitute an option, warrant or derivative
security to acquire, on the same terms and conditions as were applicable under
the IDM Option Plans or the Other Derivative Securities the same number of
shares of Parent Common Stock as the holder of such options or derivative
securities would have been entitled to receive pursuant to the Merger had such
holder exercised such option or derivative security in full immediately prior to
the Effective Time (rounded downward to the nearest whole number), at a price
per share (rounded downward to the nearest whole cent) equal to (y) the
aggregate price payable for the shares of IDM Common Stock purchasable pursuant
to such options or derivative securities immediately prior to the Effective Time
divided by (z) the number of full shares of Parent Common Stock deemed
purchasable pursuant to such options or derivative securities in accordance with
the foregoing.
C-1
<PAGE>
(b) At the Effective Time, the Parent shall assume all obligations under
each warrant issued by Fusion (the "Fusion Warrants") on or before the Effective
Time pursuant to Fusion's ongoing capital raising efforts, as permitted by
Section 5.1(b) of the Agreement. At the Effective Time, each outstanding Fusion
Warrant to purchase shares of Fusion Common Stock shall be deemed to constitute
a warrant to acquire, on the same terms and conditions as were applicable under
the Fusion Warrants, the same number of shares of Parent Common Stock as the
holder of such Fusion Warrants would have been entitled to receive pursuant to
the Merger had such holder exercised such warrants in full immediately prior to
the Effective Time (rounded downward to the nearest whole number), at a price
per share (rounded downward to the nearest whole cent) equal to (y) the
aggregate price payable for the shares of Fusion Common Stock purchasable
pursuant to the Fusion Warrants immediately prior to the Effective Time divided
by (z) the number of full shares of Parent Common Stock deemed purchasable
pursuant to the Fusion Warrants in accordance with the foregoing.
5. Amendment of Section 7.1(a). The reference in Section 7.1(a) of the
Agreement to the "unanimous vote of the stockholders of Fusion" is hereby
deleted and replaced with "majority vote of the stockholders of Fusion."
6. Ratification of Remaining Terms. Except as amended hereby, all other
terms of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf on the day and year first above written.
IDM ENVIRONMENTAL CORP. IDM/FNI ACQUISITION CORPORATION
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
----------------------- ------------------------
Name: Joel Freedman Name: Joel Freedman
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
IDM/FUSION HOLDINGS, INC. FUSION NETWORKS, INC.
By: /S/ JOEL FREEDMAN By: /S/ HERNANDO BAHAMON
------------------------ -------------------------
Name: Joel Freedman Name: Hernando Bahamon
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
C-2
<PAGE>
APPENDIX D
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of
September 16,1999 is among FUSION NETWORKS, INC., a Delaware corporation
("Fusion"), IDM ENVIRONMENTAL CORP., a New Jersey corporation ("IDM"),
IDM/FUSION HOLDINGS, INC., a Delaware corporation ("Parent"), and IDM/FNI
ACQUISITION CORPORATION, a Delaware corporation and a direct wholly owned
subsidiary of Parent (the "Merger Subsidiary").
WHEREAS, the parties hereto entered into an Agreement and Plan of Merger
dated August 18, 1999 (the "Agreement") and a First Amendment to Agreement and
Plan of Merger dated August 30, 1999 (the "First Amendment"). Capitalized terms
used and not otherwise defined herein shall have the meaning set forth in the
Agreement.
WHEREAS, the parties hereto desire to amend the Agreement in the following
respects.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follow:
1. Amendment of Section 6.2. Section 6.2(b) of the Agreement is hereby
deleted in its entirety.
2. Amendment to Section 6.6. Section 6.6 of the Agreement is amended to an
increase in the post-closing board of directors from five persons to six persons
and the reference appearing therein to "decrease the size of its board of
directors to five persons" is hereby deleted and replaced with "increase the
size of its board of directors to six persons."
3. Ratification of Remaining Terms. Except as amended hereby, all other
terms of the Agreement and First Amendment shall remain in full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf on the day and year first above written.
IDM ENVIRONMENTAL CORP. IDM/FNI ACQUISITION CORPORATION
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
------------------------ --------------------------
Name: Joel Freedman Name: Joel Freedman
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
IDM/FUSION HOLDINGS, INC. FUSION NETWORKS, INC.
By: /S/ JOEL FREEDMAN By: /S/ HERNANDO BAHAMON
------------------------ --------------------------
Name: Joel Freedman Name: Hernando Bahamon
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
D-1
<PAGE>
APPENDIX E
THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of November
2,1999 is among FUSION NETWORKS, INC., a Delaware corporation ("Fusion"), IDM
ENVIRONMENTAL CORP., a New Jersey corporation ("IDM"), IDM/FUSION HOLDINGS,
INC., a Delaware corporation ("Parent"), and IDM/FNI ACQUISITION CORPORATION, a
Delaware corporation and a direct wholly owned subsidiary of Parent (the "Merger
Subsidiary").
WHEREAS, the parties hereto entered into an Agreement and Plan of Merger
dated August 18, 1999 (the "Agreement"), a First Amendment to Agreement and Plan
of Merger dated August 30, 1999 (the "First Amendment") and a Second Amendment
to Agreement and Plan of Merger dated September 21, 1999 (the "Second
Amendment"). Capitalized terms used and not otherwise defined herein shall have
the meaning set forth in the Agreement.
WHEREAS, the parties hereto desire to amend the Agreement in the following
respects.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follow:
1. Amendment to Section 6.16(b). Section 6.16(b) of the Agreement is hereby
amended to read in full as follows:
(b) At the Effective Time, the Parent shall assume all obligations under
(a) under the Fusion Networks 1999 Stock Option Plan and (b) each warrant issued
by Fusion (the "Fusion Warrants") on or before the Effective Time pursuant to
Fusion's ongoing capital raising efforts, as permitted by Section 5.1(b) of the
Agreement. At the Effective Time, each outstanding option under the Fusion Plan
and each Fusion Warrant to purchase shares of Fusion Common Stock shall be
deemed to constitute an option or warrant to acquire, on the same terms and
conditions as were applicable under the Fusion Plan and the Fusion Warrants, the
same number of shares of Parent Common Stock as the holder of such options or
Fusion Warrants would have been entitled to receive pursuant to the Merger had
such holder exercised such options or warrants in full immediately prior to the
Effective Time (rounded downward to the nearest whole number), at a price per
share (rounded downward to the nearest whole cent) equal to (y) the aggregate
price payable for the shares of Fusion Common Stock purchasable pursuant to such
options or the Fusion Warrants immediately prior to the Effective Time divided
by (z) the number of full shares of Parent Common Stock deemed purchasable
pursuant to such options or the Fusion Warrants in accordance with the
foregoing.
2. Ratification of Remaining Terms. Except as amended hereby, all other
terms of the Agreement, the First Amendment and the Second Amendment shall
remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf on the day and year first above written.
IDM ENVIRONMENTAL CORP. IDM/FNI ACQUISITION CORPORATION
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
------------------------ ---------------------------
Name: Joel Freedman Name: Joel Freedman
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
IDM/FUSION HOLDINGS, INC. FUSION NETWORKS, INC.
By: /S/ JOEL FREEDMAN By: /S/ HERNANDO BAHAMON
------------------------ --------------------------
Name: Joel Freedman Name: Hernando Bahamon
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
E-1
<PAGE>
APPENDIX F
FOURTH AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of December
8,1999 is among FUSION NETWORKS, INC., a Delaware corporation ("Fusion"), IDM
ENVIRONMENTAL CORP., a New Jersey corporation ("IDM"), IDM/FUSION HOLDINGS,
INC., a Delaware corporation ("Parent"), and IDM/FNI ACQUISITION CORPORATION, a
Delaware corporation and a direct wholly owned subsidiary of Parent (the "Merger
Subsidiary").
WHEREAS, the parties hereto entered into an Agreement and Plan of Merger
dated August 18, 1999 (the "Agreement"), a First Amendment to Agreement and Plan
of Merger dated August 30, 1999 (the "First Amendment"), a Second Amendment to
Agreement and Plan of Merger dated September 21, 1999 (the "Second Amendment")
and a Third Amendment to Agreement and Plan of Merger dated November 2, 1999
(the "Third Amendment"). Capitalized terms used and not otherwise defined herein
shall have the meaning set forth in the Agreement.
WHEREAS, the parties hereto desire to amend the Agreement in the following
respects.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follow:
1. Amendment to Section 2.1(c). Section 2.1(c) of the Agreement is amended
to reflect a 17.7333333-for-1 stock split implemented by Fusion subsequent to
the date of the Agreement and the First Amendment and the reference appearing
therein to the right to receive "17,733.333" fully paid and non-assessable
shares which appears in the Agreement, and "17.733" fully paid and
non-assessable shares which appears in the First Amendment, is hereby deleted
and replaced with "one" fully paid and non-assessable share of common stock, par
value $0.00001 per share.
2. Ratification of Remaining Terms. Except as amended hereby, all other
terms of the Agreement, the First Amendment and the Second Amendment shall
remain in full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf on the day and year first above written.
IDM ENVIRONMENTAL CORP. IDM/FNI ACQUISITION CORPORATION
By: /S/ JOEL FREEDMAN By: /S/ JOEL FREEDMAN
------------------------ ------------------------
Name: Joel Freedman Name: Joel Freedman
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
IDM/FUSION HOLDINGS, INC. FUSION NETWORKS, INC.
By: /S/ JOEL FREEDMAN By: /S/ HERNANDO BAHAMON
------------------------- --------------------------
Name: Joel Freedman Name: Hernando Bahamon
Title:President and Title:President and
Chief Executive Officer Chief Executive Officer
F-1
<PAGE>
APPENDIX G
Chartered Capital Advisers, Inc.
145 Fourth Avenue
New York, New York 10003
(212) 505-9743 - (212) 533-9680 Fax
August 18, 1999
Board of Directors
IDM Environmental Corp.
396 Whitehead Avenue
South River, NJ 08882
Dear Members of the Board of Directors:
We understand that IDM Environmental Corp. ("IDM" or the "Company") and
Fusion Networks, Inc. ("Fusion") propose to enter into a merger (the "Merger")
in the form detailed in the the Agreement and Plan of Merger (the "Merger
Agreement")1 dated as of August 18, 1999. The proposed Merger Agreement and the
related Plan of Reorganization and Merger2 (the "Reorganization Agreement")
indicate that, among other things:
(i) IDM will merge with a newly formed, wholly owned subsidiary of a newly
formed holding companyBIDM/Fusion Holdings, Inc. ("Holdings") ;
(ii) The common stock of IDM will be exchanged on a share-for-share basis
for common stock of Holdings, resulting in the issuance of
approximately 3,331,085 shares of Holdings common stock to current IDM
shareholders;
(iii)The rights of holders of options and warrants to purchase the common
stock of IDM will be converted on a share-for-share basis into rights
to purchase Holdings common stock on identical pricing and terms as
were outstanding as of the date of this letter;
(iv) Fusion will merge with a newly created, wholly owned subsidiary of
Holdings;
(v) Each share of the common stock of Fusion will be exchanged for
17,733.333 shares of the common stock of Holdings, resulting in the
issuance of approximately 26,600,000 shares of Holdings common stock
to the current Fusion shareholders; and
- --------------
1 Agreement and Plan of Merger among Fusion Networks, Inc., IDM Environmental
Corp., IDM/Fusion Holdings, Inc., and IDM/FNI Acquisition Corporation.
2 Plan of Reorganization and Merger among IDM Environmental Corp., IDM/Fusion
Holdings, Inc., and IDM Merger Subsidiary.
G-1
<PAGE>
Board of Directors
August 18, 1999
Page 2
(vi) After the effective date of the Merger, the Company will file a
registration statement to permit the resale in the public markets of
up to 7,300,000 shares of Holdings common stock issued to Fusion
shareholders, other than members of Fusion management.
The Merger is subject to approval by IDM shareholders. The effect of the above
transactions would be that, based on the number of outstanding common shares of
IDM and Fusion as of August 18, 1999, the IDM shareholders would own
approximately 11.1% of the common stock of Holdings. Moreover, it is probable
that the capital requirements of the business of Fusion would result in
significant future dilution of the interests of IDM shareholders in Holdings.
You have requested our opinion as to the fairness of the Merger, from a
financial point of view, to the shareholders of IDM. Chartered Capital Advisers,
Inc. ("Chartered Capital Advisers") is customarily engaged in the valuation of
businesses and their securities in connection with mergers & acquisitions,
private placements, shareholder transactions, estate and gift taxes, litigation,
and for other purposes.
In connection with rendering our opinion we have, among other things:
(i) Reviewed the Merger Agreement and Reorganization Agreement;
(ii) Analyzed a business plan and financial projections prepared by
Fusion dated August 10, 1999;
(iii)Interviewed an Internet consultant who advised IDM in its
evaluation of Fusion;
(iv) Analyzed information with respect to IDM, including unaudited
financial statements as of and for the six months ended June 30,
1999, audited financial statements as of and for the five years
ended December 31, 1998, a business plan that was prepared during
1999, press releases, marketing information, and various internal
management documents;
(v) Reviewed various documents filed by IDM with the Securities and
Exchange Commission, including but not limited to the Forms 10K
for the three years ended December 31, 1998, the Forms 10Q for
the quarters ended March 31, 1999 and June 30, 1999, the amended
Form 8K filed as of June 21, 1999, and the Form 14A filed as of
April 30, 1999;
G-2
<PAGE>
Board of Directors
August 18, 1999
Page 3
(vi) Interviewed the management of Fusion and their advisors and held
discussions regarding the past, current, and planned operations,
financial condition, and business prospects of Fusion;
(vii)Visited the facilities of IDM and held discussions with certain
members of its management and its advisors concerning the past,
current, and planned operations, financial condition, and
business prospects of IDM;
(viii)Analyzed historical stock prices of IDM;
(ix) Discussed with the legal advisors of IDM the results of their due
diligence;
(x) Considered relevant data of IDM and Fusion, and have compared
that data with applicable data for publicly held companies with
investment characteristics relevant to IDM and Fusion;
(xi) Considered relevant data of IDM and Fusion, and have compared
that data with applicable data for certain business combinations
and other transactions that have recently been effectuated;
(xii)Considered relevant data of Fusion, and have compared that data
with applicable data for certain venture capital transactions
that have recently been effectuated;
(xiii)Considered the prospective financial performance of IDM and
Fusion;
(xiv)Considered the financial condition, historical losses, and
strategic and financing alternatives of IDM;
(xv) Considered the potential impact of the Merger upon the future
stock price of Holdings;
(xvi)Considered the relative values of IDM and Fusion;
(xvii)Considered U.S. securities laws limitations that would, for
the twelve months following the Merger, limit dispositions in the
secondary market of Holdings common stock by the principal IDM
shareholders;
(xiii)Considered U.S. securities laws limitations that would, for the
twelve months following the Merger, prohibit dispositions in the
secondary market of Holdings common stock issued to Fusion
shareholders, other than those shares that the Company plans to
register, which would be limited to no more than 7,300,000 shares
issued to nonmanagement Fusion shareholders; and
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Board of Directors
August 18, 1999
Page 4
(xix)Considered such other information, financial studies, and
analyses as we deemed relevant, and performed such analyses,
studies, and investigations as we deemed appropriate.
Chartered Capital Advisers has assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by us.
We have assumed that the representations of the management of IDM and Fusion
have been made in good faith, and that they reflect the best currently available
management judgments as to the matters covered. We have assumed that the
management of Fusion will be able to complete its website and make it available
to the public without significant service problems within the time frame and at
costs that Fusion management represents are achievable.
Our opinion is necessarily based upon economic, market, and other
conditions as in effect on, and the information made available to us as of, the
date of this letter. Our opinion is limited to the fairness of the Merger as of
the date hereof, from a financial point of view. Although developments following
the date of our opinion may affect the opinion, Chartered Capital Advisers
assumes no obligation to update, revise, or reaffirm its opinion. It should be
understood that subsequent developments may affect the conclusion expressed in
our opinion. We disclaim any undertaking or obligation to advise any person of
any change in any matter affecting the opinion which may come or be brought to
our attention after the date of this opinion. We make no representations with
respect to the business decision to undertake the Merger, or any other terms of
the Merger Agreement. This opinion does not represent our opinion as to the
value of Fusion or IDM and/or their respective tangible and intangible assets.
We have assumed that the Merger would qualify as a tax-free reorganization in
the United States as well as in any other countries that could have jurisdiction
over the tax consequences of the Merger.
Fusion is subject to numerous risks, including but not limited to:
(i) A limited operating history;
(ii) Its web site is not yet operational;
(iii) Dependence upon key members of management;
(iv) Need to expand the management team, recruit employees, and commence
operations in several locations;
(v) Risk of technological problems that could impede the ability of its
web site to operate at an effective level;
(vi) Risk of technological obsolescence;
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Board of Directors
August 18, 1999
Page 5
(vii)Need to develop mutually beneficial relationships with advertisers,
content providers, and strategic partners;
(viii) Reliance on telecommunication systems in diverse markets whose
quality and consistency varies;
(ix) Need to gain visibility among Internet users in diverse markets;
(x) Lack of historical revenues, and lack of any material projected
revenues during the remainder of 1999;
(xi) Competition from companies that are already generating revenues and
which have significantly greater financial resources than the
collective financial resources of Fusion and IDM;
(xii)Requirement for significant funding whose availability, terms, and
cost cannot currently be assured; and
(xiii) Significant prospective dilution of the current IDM shareholders=
aggregate ownership position in Holdings due to the need to fund the
prospective growth of Fusion.
Notwithstanding the above, the management of IDM and Fusion and their
advisors believe that Fusion has the potential to realize significant capital
appreciation on a near-term and long-term basis. Moreover, IDM also has
significant risks. These risks include those resulting from continuous losses by
IDM since the Company went public in 1995 and the lack of any immediate plans to
raise additional capital in the event that prospective losses and/or capital
requirements could cause the Company require additional capital. Accordingly, we
have evaluated fairness, in part, based on the potential opportunities available
to IDM shareholders as a consequence of the Merger, as well as prospects and
risks in the event that IDM continued to remain an independent entity.
In connection with the preparation of its opinion, Chartered Capital
Advisers was not authorized by IDM or its board of directors to solicit, nor did
it solicit, third-party indications of interest for all or any part of IDM. We
are not expressing any opinion herein as to the prices at which Holdings common
stock will trade following the Merger. Our opinion does not address the merits
of the underlying decision by the Company to engage in the Merger, and does not
constitute a recommendation to the IDM board of directors or shareholders to
approve the Merger. This letter is not intended to substitute for the Board=s
exercise of its own business judgment in reviewing the Merger.
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Board of Directors
August 18, 1999
Page 6
Based upon and subject to the foregoing considerations, it is our opinion
that, as of the date hereof, the Merger is fair, from a financial point of view,
to the shareholders of IDM.
The foregoing opinion is to be used solely for the information and
assistance of IDM. Accordingly, it is understood and agreed that no person other
than IDM and its officers, directors, and shareholders shall be allowed to use
or rely upon this opinion.
Very truly yours,
CHARTERED CAPITAL ADVISERS, INC.
/s/ Ronald G. Quintero
Ronald G. Quintero, CPA, CFA, ABV
Managing Director
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APPENDIX H
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
IDM/FUSION HOLDINGS, INC.
The Corporation was incorporated under the name "IDM/Fusion Holdings, Inc."
by the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware on August 18, 1999. This Restated Certificate of
Incorporation of the Corporation, which both restates and further amends the
provisions of the Corporation's Certificate of Incorporation, was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware and by the unanimous written consent of
its stockholders in accordance with Section 228 of the General Corporation Law
of the State of Delaware. The Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is Fusion Networks Holdings, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is c/o United Corporate Services, Inc., 15 East North Street,
in the City of Dover, County of Kent, State of Delaware 19901 and the name of
the registered agent at said address is United Corporate Services, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware (the "GCL").
FOURTH: A. The total number of shares of stock which the Corporation shall
have authority to issue is 101,000,000 (the "Capital Stock") consisting of
100,000,000 shares of Common Stock, par value $.00001 per share (the "Common
Stock"), and 1,000,000 shares of Preferred Stock, par value of $.00001 per share
(the "Preferred Stock").
B. Shares of Preferred Stock may be issued from time to time in one or more
series, as provided for herein or as provided for by the Board of Directors as
permitted hereby. All shares of Preferred Stock shall be of equal rank and shall
be identical, except in respect of the terms fixed herein for the series
provided for herein or fixed by the Board of Directors for any series provided
for by the Board of Directors as permitted hereby. All shares of any one series
shall be identical in all respects with all the other shares of such series,
except the shares of any one series issued at different times may differ as to
the dates from which dividends thereon may be cumulative.
The Board of Directors is hereby authorized, by resolution or resolutions,
to establish, out of the unissued shares of Preferred Stock not then allocated
to any series of Preferred Stock, additional series of Preferred Stock. Before
any shares of any such additional series are issued, the Board of Directors
shall fix and determine, and is hereby expressly empowered to fix and determine,
by resolution or resolutions, the number of shares constituting such series and
the distinguishing characteristics and the relative rights, preferences,
privileges and immunities, if any, and any qualifications, limitations or
restrictions thereof, of the shares thereof, so far as not inconsistent with the
provisions of this Article FOURTH. Without limiting the generality of the
foregoing, the Board of Directors may fix and determine: 1. The designation of
such series and the number of shares which shall constitute such series of such
shares;
2. The rate of dividend, if any, payable on shares of such series;
3. Whether the shares of such series shall be cumulative, non-cumulative or
partially cumulative as to dividends, and the dates from which any cumulative
dividends are to accumulate;
4. Whether the shares of such series may be redeemed, and, if so, the price
or prices at which and the terms and conditions on which shares of such series
may be redeemed;
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5. The liquidation preference of each series in the event of the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Corporation;
6. The sinking fund provisions, if any, for the redemption of shares of
such series;
7. The voting rights, if any, of the shares of such series;
8. The terms and conditions, if any, on which shares of such series may be
converted into shares of capital stock of the Corporation of any other class or
series;
9. Whether the shares of such series are to be preferred over shares of
capital stock of the Corporation of any other class or series as to dividends,
or upon the voluntary or involuntary dissolution, liquidation, or winding up of
the affairs of the Corporation, or otherwise; and
10. Any other characteristics, preferences, limitations, rights,
privileges, immunities or terms not inconsistent with the provisions of this
Article FOURTH.
C. Except as otherwise provided in this Restated Certificate of
Incorporation, each holder of Common Stock shall be entitled to one vote for
each share of Common Stock held by him on all matters submitted to stockholders
for a vote and each holder of Preferred Stock of any series that is Voting Stock
(as hereinafter defined) shall be entitled to such number of votes for each
share held by him as may be specified herein or in the Certificate of
Designation in respect thereof.
Except as otherwise provided by law, the presence, in person or by proxy,
of the holders of record of issued and outstanding shares of Capital Stock
entitling the holders thereof to cast a majority of the votes entitled to be
cast by the holders of issued and outstanding shares of Capital Stock entitled
to vote shall constitute a quorum at all meetings of the stockholders.
FIFTH: No stockholder action may be taken except at an annual or special
meeting of stockholders of the Corporation and stockholders of the Corporation
may not take any action by written consent in lieu of a meeting.
SIXTH: A. The Board of Directors shall have the power to make, adopt,
alter, amend, change or repeal the Amended and Restated Bylaws of the
Corporation (the "Bylaws") by resolution adopted by the affirmative vote of a
majority of the entire Board of Directors, subject to any law or Bylaw provision
requiring the affirmative vote of a larger percentage of the members of the
Board of Directors.
B. Stockholders may not make, adopt, alter, amend, change or repeal the
Bylaws of the Corporation or any provision of this Restated Certificate of
Incorporation except upon the affirmative vote of more than 50% of the votes
entitled to be cast by the holders of all outstanding shares then entitled to
vote generally in the election of directors, voting together as a single class.
SEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or thereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
EIGHTH: No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is hereafter amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of each
director of the Corporation shall be limited or eliminated to the fullest extent
permitted by the GCL as so amended from time to time. The Corporation shall
indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of the
GCL, as amended from time to time, each person that such Sections grant the
corporation the power to indemnify.
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IN WITNESS WHEREOF, said corporation has caused this Certificate to be
signed by Joel A. Freedman, its President and attested by Frank A. Falco, its
Secretary, this 21st day of September, 1999.
By:/S/ JOEL FREEDMAN
-----------------
Joel A. Freedman
President
ATTEST:
/S/ FRANK FALCO
Frank A. Falco
Secretary
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APPENDIX I
BYLAWS
OF
FUSION NETWORKS HOLDINGS, INC.
ARTICLE I.
OFFICES
SECTION 1. Registered Office. The registered office of Fusion Networks
Holdings, Inc. (the "Corporation") shall be at c/o United Corporate Services,
Inc., 15 East North Street, in the City of Dover, County of Kent, State of
Delaware.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors of the Corporation (the "Board of Directors") may from time to time
determine.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders for the election
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
SECTION 2. Annual Meetings. The annual meeting of stockholders shall be
held on such date and at such time as may be fixed by the Board of Directors and
stated in the notice of the meeting, for the purpose of electing directors and
for the transaction of only such other business as is properly brought before
the meeting in accordance with these Bylaws (these "Bylaws").
Written notice of an annual meeting stating the place, date and hour of the
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
To be properly brought before the annual meeting, business must be either
(i) specified in the notice of annual meeting (or any supplement or amendment
thereto) given by or at the direction of the Board of Directors, (ii) otherwise
brought before the annual meeting by or at the direction of the Board of
Directors, or (iii) otherwise properly brought before the annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
sixty (60) days nor more than ninety (90) days prior to the meeting; provided,
however, that in the event that less than seventy (70) days notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by a stockholder, to be timely, must be received no later
than the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made, whichever first occurs. A stockholder's notice to the
Secretary shall set forth (a) as to each matter the stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, and (ii) any material interest of the
stockholder in such business, and (b) as to the stockholder giving the notice
(i) the name and record address of the stockholder and (ii) the class, series
and number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at the annual meeting except in
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accordance with the procedures set forth in this Article II, Section 2. The
officer of the Corporation presiding at an annual meeting shall, if the facts
warrant, determine and declare to the annual meeting that business was not
properly brought before the annual meeting in accordance with the provisions of
this Article II, Section 2, and if such officer should so determine, such
officer shall so declare to the annual meeting and any such business not
properly brought before the meeting shall not be transacted.
SECTION 3. Special Meetings. Unless otherwise prescribed by law or by the
Restated Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), special meetings of stockholders, for any purpose or purposes,
may only be called by a majority of the entire Board of Directors or by the
President.
Written notice of a special meeting stating the place, date and hour of the
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
SECTION 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the holders of a
majority of the votes entitled to be cast by the stockholders entitled to vote
thereat, present in person or represented by proxy may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented by proxy. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting.
SECTION 5. Voting. Unless otherwise required by law, the Certificate of
Incorporation, the rules or regulations of any stock exchange applicable to the
Corporation or these Bylaws, any question (other than the election of directors)
brought before any meeting of stockholders shall be decided by the vote of the
holders of a majority of the stock represented and entitled to vote thereat. At
all meetings of stockholders for the election of directors, a plurality of the
votes cast shall be sufficient to elect. Each stockholder represented at a
meeting of stockholders shall be entitled to cast one vote for each share of the
capital stock entitled to vote thereat held by such stockholder, unless
otherwise provided by the Certificate of Incorporation. Such votes may be cast
in person or by proxy but no proxy shall be voted after three years from its
date, unless such proxy provides for a longer period. The Board of Directors, in
its discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his discretion, may require that any votes cast at such meeting
shall be cast by written ballot.
SECTION 6. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
SECTION 7. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 6 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III.
DIRECTORS
SECTION 1. Number of Directors. The total number of persons serving on the
Board of Directors of the Corporation shall be not less than five (5) persons
nor more than eleven (11) persons, which Directors shall be elected by the
stockholders at their annual meeting. The initial Board of Directors is hereby
fixed at five (5) persons. The Board of Directors may, by a vote of not less
than a majority of the authorized number of Directors, increase or decrease the
number of Directors from time to time without a vote of the stockholders
provided, however, that any such decrease shall not eliminate any Director then
in office.
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SECTION 2. Nomination of Directors. Nominations of persons for election to
the Board of Directors of the Corporation at a meeting of stockholders of the
Corporation may be made at such meeting by or at the direction of the Board of
Directors, by any committee or persons appointed by the Board of Directors or by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Article III, Section 2. Such nominations by any stockholder shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the meeting; provided however, that in
the event that less than seventy (70) days notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder, to be timely, must be received no later than that the close of
business on the tenth (10th) day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
first occurs. Such stockholder's notice to the Secretary shall set forth (i) as
to each person whom the stockholder proposes to nominate for election or
reelection as a director, (a) the name, age, business address and residence
address of the person, (b) the principal occupation or employment of the person,
(c) the class and number of shares of capital stock of the Corporation which are
beneficially owned by the person, and (d) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to the Rules and Regulations of the Securities
and Exchange Commission under Section 14 of the Securities Exchange Act of 1934,
as amended; and (ii) as to the stockholder giving the notice (a) the name and
record address of the stockholder and (b) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the
stockholder. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The officer of the Corporation presiding at an annual meeting shall, if the
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the foregoing procedure, and if he should so determine,
he shall so declare to the meeting and the defective nomination shall be
disregarded.
SECTION 3. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman of the Board or Chief Executive Officer or the President or Chief
Operating Officer or a majority of the entire Board of Directors. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail not less than forty-eight (48) hours before the date of the
meeting, by telephone or telegram on twenty-four (24) hours notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
SECTION 4. Quorum. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these Bylaws, at all meetings of the Board
of Directors or any committee thereof, a majority of the entire Board of
Directors or such committee, as the case may be, shall constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the Board of
Directors or such committee, as the case may be. If a quorum shall not be
present at any meeting of the Board of Directors or of any committee thereof, a
majority of the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 5. Actions of Board of Directors. Unless otherwise provided by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
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SECTION 6. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Article III, Section 6 shall
constitute presence in person at such meeting.
SECTION 7. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any disqualified member at
any meeting of any such committee. In the disqualification of a member of a
committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the disqualified member, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any disqualified
member. Any committee, to the extent allowed by law and provided in the
resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required.
SECTION 8. Compensation. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
SECTION 9. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the shareholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV.
OFFICERS
SECTION 1. General. The officers of the Corporation shall be elected by the
Board of Directors and shall consist of: a Chairman of the Board; a Chief
Executive Officer; a President; a Chief Operating Officer; a Secretary; and a
Treasurer. The Board of Directors, in its discretion, may also elect one or more
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant
Secretaries, Assistant Treasurers, a Controller and such other officers as in
the judgment of the Board of Directors may be necessary or desirable. Any number
of offices may be held by the same person and more than one person may hold the
same office, unless otherwise prohibited by law, the Certificate of
Incorporation or these Bylaws. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board of Directors, need such officers be directors of the Corporation.
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SECTION 2. Election. The Board of Directors at its first meeting held after
each annual meeting of stockholders shall elect the officers of the Corporation
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Except as otherwise provided in this Article IV, any officer elected by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors. The salaries of all
officers who are directors of the Corporation shall be fixed by the Board of
Directors.
SECTION 3. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the Chairman of the Board and Chief Executive
Officer, the President and Chief Operating Officer or any Vice President, and
any such officer may, in the name and on behalf of the Corporation, take all
such action as any such officer may deem advisable to vote in person or by proxy
at any meeting of security holders of any corporation in which the Corporation
may own securities and at any such meeting shall possess and may exercise any
and all rights and powers incident to the ownership of such securities and
which, as the owner thereof, the Corporation might have exercised and possessed
if present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
SECTION 4. Chairman or Co-Chairmen of the Board. The Chairman or
Co-Chairmen of the Board shall be members of the Board of Directors, and shall
exercise and perform such duties and have such powers as may be prescribed by
the Board of Directors or these Bylaws, all in accordance with basic policies as
established by and subject to the oversight of the Board of Directors.
SECTION 5. Chief Executive Officer. The Chief Executive Officer of the
Corporation shall supervise, coordinate and manage the Corporation's business
and activities and supervise, coordinate and manage its operating expenses and
capital allocation, shall have general authority to exercise all the powers
necessary for the Chief Executive Officer of the Corporation and shall perform
such other duties and have such other powers as may be prescribed by the Board
of Directors or these Bylaws, all in accordance with basic policies as
established by and subject to the oversight of the Board of Directors. In the
absence or disability of the Chairman of the Board, the duties of the Chairman
of the Board shall be performed and the Chairman of the Board's authority may be
exercised by the Chief Executive Officer and, in the event the Chief Executive
Officer is absent or disabled, such duties shall be performed and such authority
may be exercised by a director designated for such purpose by the Board of
Directors.
SECTION 6. President. The President shall supervise, coordinate and manage
the Corporation's business and activities and supervise, coordinate and manage
its operating expenses and capital allocation, shall have general authority to
exercise all the powers necessary for the President of the Corporation and shall
perform such other duties and have such other powers as may be prescribed by the
Board of Directors or these, all in accordance with basic policies as
established by and subject to the oversight of the Board of Directors, the
Chairman of the Board and the Chief Executive Officer. In the absence or
disability of the Chairman of the Board and Chief Executive Officer, the duties
of the Chairman of the Board shall be performed and the Chairman of the Board's
authority may be exercised by the President or Chief Operating Officer and, in
the event the President or Chief Operating Officer is absent or disabled, such
duties shall be performed and such authority may be exercised by a director
designated for such purpose by the Board of Directors.
SECTION 7. Chief Operating Officer. The Chief Operating Officer shall
supervise, coordinate and manage the Corporation's business and activities and
supervise, coordinate and manage its operating expenses and capital allocation,
shall have general authority to exercise all the powers necessary for the Chief
Operating Officer of the Corporation and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors or these
Bylaws, all in accordance with basic policies as established by and subject to
the oversight of the Board of Directors and the Chairman of the Board and Chief
Executive Officer. In the absence or disability of the Chairman of the Board and
Chief Executive Officer, the duties of the Chairman of the Board shall be
performed and the Chairman of the Board's authority may be exercised by the
President or Chief Operating Officer and, in the event the President or Chief
Operating Officer is absent or disabled, such duties shall be performed and such
authority may be exercised by a director designated for such purpose by the
Board of Directors.
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SECTION 8. Vice Presidents. At the request of the President or Chief
Operating Officer or in the absence of each of the Chairman of the Board, Chief
Executive Officer, President and Chief Operating Officer, or in the event of
their inability or refusal to act , the Vice President or the Vice Presidents if
there is more than one (in the order designated by the Board of Directors) shall
perform the duties of the Chairman of the Board, Chief Executive Officer,
President and/or Chief Operating Officer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon such offices (other than
as Chairman of the Board). Each Vice President shall perform such other duties
and have such other powers as the Board of Directors from time to time may
prescribe. If there be no Vice President, the Board of Directors shall designate
the officer of the Corporation who, in the absence of each of the Chairman of
the Board, Chief Executive Officer, President and Chief Operating Officer or in
the event of the inability or refusal of such officers to act, shall perform the
duties of such offices (other than as Chairman of the Board), and when so
acting, shall have all the powers of and be subject to all the restrictions upon
such offices (other than as Chairman of the Board).
SECTION 9. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors, the Chairman of the Board and
Chief Executive Officer or the President and Chief Operating Officer, under
whose supervision the Secretary shall be. If the Secretary shall be unable or
shall refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
Secretary, then the Board of Directors, the Chairman of the Board and Chief
Executive Officer or the President and Chief Operating Officer may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature. The Secretary
shall see that all books, reports, statements, certificates and other documents
and records required by law to be kept or filed are properly kept or filed, as
the case may be.
SECTION 10. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
SECTION 11. Assistant Secretaries. Except as may be otherwise provided in
these Bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or the Chief Operating Officer, any Vice President, if there be one,
or the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
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SECTION 12. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President, the Chief Operating Officer, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his disability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
SECTION 13. Controller. The Controller shall establish and maintain the
accounting records of the Corporation in accordance with generally accepted
accounting principles applied on a consistent basis, maintain proper internal
control of the assets of the Corporation and shall perform such other duties as
the Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President, the Chief Operating Officer or any Vice President of the
Corporation may prescribe.
SECTION 14. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V.
STOCK
SECTION 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board and Chief Executive Officer, the President and
Chief Operating Officer or a Vice President and (ii) by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
SECTION 2. Signatures. Any or all of the signatures on the certificate may
be a facsimile, including, but not limited to, signatures of officers of the
Corporation and countersignatures of a transfer agent or registrar. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.
SECTION 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
SECTION 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these Bylaws. Transfers of stock shall be made
on the books of the Corporation only by the person named in the certificate or
by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
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ARTICLE VI.
INDEMNIFICATION
SECTION 1. Third Party Actions. The Corporation shall, to the fullest
extent permitted by Delaware law, indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. Actions by or in the Right of the Corporation. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in manner he reasonably believed to be in or
not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
SECTION 3. Successful Defense. To the extent that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 1
and 2, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
SECTION 4. Determination of Conduct. Any indemnification under Sections 1
and 2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that the indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in Sections 1 and 2.
Such determination shall be made (1) by the board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
SECTION 5. Payment of Expenses in Advance. Expenses incurred in defending a
civil or criminal action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article VI.
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SECTION 6. Indemnity Not Exclusive. The indemnification and advancement of
expenses provided or granted pursuant to the other subsections of this section
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another while holding
such office.
SECTION 7. Insurance Indemnification. The Corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article VI.
SECTION 8. The Corporation. For purposes of this Article VI, references to
"the Corporation" shall include, in addition to the resulting Corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under and subject to the provisions of this Article VI
(including, without limitation the provisions of Section 4) with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
SECTION 9. Continuation of Indemnification and Advancement of Expenses. The
indemnification and advanced of expenses provided by, or granted pursuant to,
this Article VI shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
ARTICLE VII
AMENDMENTS
The original or other Bylaws of the Corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
Corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
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APPENDIX J
IDM ENVIRONMENTAL CORP. 1998
COMPREHENSIVE STOCK OPTION AND AWARD PLAN
(As amended September 21, 1999, subject to shareholder approval)
ARTICLE I -- PREAMBLE
1.1 The IDM Environmental Corp. 1998 Comprehensive Stock Option and Award
Plan is intended to secure for the Corporation, its Subsidiaries and its
shareholders the benefits arising from ownership of the Corporation's Common
Stock by the employees of the Corporation and its Subsidiaries and by the
directors and certain key consultants of the Corporation, all of whom are and
will be responsible for the Corporation's future growth. The Plan is designed to
help attract and retain for the Corporation and its Subsidiaries personnel of
superior ability for positions of exceptional responsibility, to reward
employees, directors and consultants for past services and to motivate such
individuals through added incentives to further contribute to the success of the
Corporation. With respect to persons subject to Section 16 of the Act,
transactions under this Plan are intended to satisfy the requirements of Rule
16b-3 of the Act.
1.2 Awards under the Plan may be made to Eligible Persons in the form of
(i) Incentive Stock Options (to Eligible Employees only); (ii) Nonqualified
Stock Options; (iii) Restricted Stock; (iv) Stock Awards; (v) Performance
Shares; or (vi) any combination of the foregoing.
1.3 The Plan shall be effective January 8, 1998 (the "Effective Date"),
subject to approval by the shareholders of the Corporation to the extent
necessary to satisfy the requirements of the Code, The Nasdaq Stock Market, or
other applicable federal or state law.
ARTICLE II -- DEFINITIONS
DEFINITIONS. Except where the context otherwise indicates, the following
definitions apply:
2.1 "Act" means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended.
2.2 "Award" means an award granted to a Participant in accordance with the
provisions of the Plan, including, but not limited to, Stock Options, Restricted
Stock, Stock Awards, Performance Shares, or any combination of the foregoing.
2.3 "Award Agreement" means the separate written agreement evidencing each
Award granted to a Participant under the Plan.
2.4 "Board of Directors" means the Board of Directors of the Corporation.
2.5 "Change of Control" means (i) the adoption of a plan of merger or
consolidation of the Corporation with any other corporation or association as a
result of which the holders of the voting capital stock of the Corporation as a
group would receive less than 50% of the voting capital stock of the surviving
or resulting corporation; (ii) the approval by the Board of Directors of an
agreement providing for the sale or transfer (other than as security for
obligations of the Corporation) of substantially all the assets of the
Corporation; or (iii) in the absence of a prior expression of approval by the
Board of Directors, the acquisition of more than 20% of the Corporation's voting
capital stock by any person within the meaning of Section 13(d)(3) of the Act,
other than a person, or group including a person, who beneficially owned, as of
the Effective Date, more than 5.0% of the Corporation's voting capital stock.
2.6 "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
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2.7 "Committee" means a committee of the Board of Directors established for
the administration of the Plan pursuant to Article III and consisting of two or
more Directors. To the extent necessary to comply with Rule 16b-3 under the Act,
the Committee shall consist solely of two or more Non-Employee Directors. The
Compensation Committee of the Board of Directors shall constitute the Committee
until otherwise determined by the Board of Directors.
2.8 "Common Stock" means the common stock of the Corporation to be issued
pursuant to the Plan.
2.9 "Corporation" means IDM Environmental Corp., a New Jersey corporation,
and its successors and assigns.
2.10 "Director" means a member of the Board of Directors of the
Corporation.
2.11 "Disability" means disability as determined under procedures
established by the Committee or in any Award, as set forth in a Participant's
Award Agreement.
2.12 "Effective Date" shall be the date set forth in Section 1.3 of the
Plan.
2.13 "Eligible Employee" means an Eligible Person who is an employee of the
Corporation or any Subsidiary.
2.14 "Eligible Person" means any employee of the Corporation or any
Subsidiary or any Director, as well as any consultant or other person whose
participation the Committee determines is in the best interest of the
Corporation, subject to limitations as may be provided by the Code, the Act or
the Committee.
2.15 "ERISA" means the Employee Retirement Income Security Act of 1974, as
now in effect or as hereafter amended.
2.16 "Fair Market Value" means, as of a given date and for so long as
shares of the Common Stock are listed on a national securities exchange or
reported on The Nasdaq Stock Market as a Nasdaq National Market security, the
mean between the high and low sales prices for the Common Stock on such date,
or, if no such shares were sold on such date, the most recent date on which
shares of such Common Stock were sold, as reported in The Wall Street Journal.
If the Common Stock is not listed on a national securities exchange or reported
on The Nasdaq Stock Market as a Nasdaq National Market security, Fair Market
Value shall mean the average of the closing bid and asked prices for such stock
in the over-the-counter market as reported by The Nasdaq Stock Market. If the
Common Stock is not listed on a national securities exchange or reported on The
Nasdaq Stock Market as a Nasdaq National Market security, or the
over-the-counter market, Fair Market Value shall be the fair value thereof
determined in good faith by the Board of Directors.
2.17 "Grant Date" means, as to any Award, the latest of:
(a) the date on which the Committee authorizes the grant of the Award; or
(b) the date the Participant receiving the Award becomes an employee or a
director of the Corporation or its Subsidiaries, to the extent employment status
is a condition of the grant or a requirement of the Code or the Act; or
(c) such other date (later than the dates described in (a) and (b) above)
as the Committee may designate and as set forth in the Participant's Award
Agreement.
2.18 "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include
adoptive relationships.
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2.19 "Incentive Stock Option" means a Stock Option that meets the
requirements of Section 422 of the Code and is granted under Article IV of the
Plan and designated as an Incentive Stock Option in a Participant's Award
Agreement.
2.20 "Non-Employee Director" shall have the meaning set forth in Rule 16b-3
under the Act.
2.21 "Nonqualified Stock Option" means a Stock Option that does not meet
the requirements of Section 422 of the Code and is granted under Article V of
the Plan, or, even if meeting the requirements of Section 422 of the Code, is
not intended to be an Incentive Stock Option and is not so designated in the
Participant's Award Agreement.
2.22 "Option Period" means the period during which a Stock Option may be
exercised from time to time, as established by the Committee and set forth in
the Award Agreement for each Participant who is granted a Stock Option.
2.23 "Option Price" means the purchase price for a share of Common Stock
subject to purchase pursuant to a Stock Option, as established by the Committee
and set forth in the Award Agreement for each Participant who is granted a Stock
Option.
2.24 "Participant" means an Eligible Person to whom an Award has been
granted and who has entered into an Award Agreement evidencing the Award.
2.25 "Performance Objectives" shall have the meaning set forth in Article
IX of the Plan.
2.26 "Performance Period" shall have the meaning set forth in Article IX of
the Plan.
2.27 "Performance Share" means an Award under Article IX of the Plan of a
unit valued by reference to the Common Stock, the payout of which is subject to
achievement of such Performance Objectives, measured during one or more
Performance Periods, as the Committee, in its sole discretion, shall establish
at the time of such Award and set forth in a Participant's Award Agreement.
2.28 "Plan" means the IDM Environmental Corp. 1998 Comprehensive Stock
Option and Award Plan, as amended from time to time.
2.29 "Restricted Stock" means an Award under Article VII of the Plan of
shares of Common Stock that are at the time of the Award subject to restrictions
or limitations as to the Participant's ability to sell, transfer, pledge or
assign such shares, which restrictions or limitations may lapse separately or in
combination at such time or times, in installments or otherwise, as the
Committee, in its sole discretion, shall determine at the time of such Award and
set forth in a Participant's Award Agreement.
2.30 "Restriction Period" means the period commencing on the Grant Date
with respect to such shares of Restricted Stock and ending on such date as the
Committee, in its sole discretion, shall establish and set forth in a
Participant's Award Agreement.
2.31 "Retirement" means retirement as determined under procedures
established by the Committee or in any Award, as set forth in a Participant's
Award Agreement.
2.32 "Stock Award" means an Award of shares of Common Stock under Article
VIII of the Plan.
2.33 "Stock Option" means an Award under Article IV or Article V of the
Plan of an option to purchase Common Stock. A Stock Option may be either an
Incentive Stock Option or a Nonqualified Stock Option.
2.34 "Subsidiary" means a subsidiary corporation of the Corporation as that
term is defined in Code section 424(f). "Subsidiaries" means more than one
Subsidiary.
2.35 "Ten Percent Stockholder" means an individual who, at the time of
grant, owns stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Corporation. 2.36 "Termination of
Service" means (i) in the case of an Eligible Employee, the discontinuance of
employment of such Participant with the Corporation or its Subsidiaries for any
reason other than a transfer to another member of the group consisting of the
Corporation and its Subsidiaries and (ii) in the case of a Director who is not
an employee of the Corporation or any Subsidiary, the date such Participant
ceases to serve as a Director. The determination of whether a Participant has
discontinued service shall be made by the Committee in its sole discretion. In
determining whether a Termination of Service has occurred, the Committee may
provide that service as a consultant or service with a business enterprise in
which the Corporation has a significant ownership interest shall be treated as
employment with the Corporation.
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ARTICLE III -- ADMINISTRATION
3.1 The Plan shall be administered by the Committee. Except as otherwise
required by Rule 16b-3 under the Act, the Committee, in its discretion, may
delegate to one or more of its members such of its powers as it deems
appropriate. The Committee also may limit the power of any member to the extent
necessary to comply with Rule 16b-3 under the Act or any other law, rule or
regulation. The Board of Directors may serve as the Committee, if by the terms
of the Plan all members of the Board of Directors are otherwise eligible to
serve on the Committee.
3.2 The Committee shall meet at such times and places as it determines. The
Committee shall at all times operate and be governed, and Committee meetings
shall be conducted and action taken, in accordance with the provisions of the
Corporation's Bylaws or resolutions or policies adopted by the Board of
Directors from time to time regarding the operation of committees of the
Corporation.
3.3 Except as set forth in Sections 3.15 and 3.16 regarding grants of
Awards by the Board of Directors and grants of Awards to Non-employee Directors,
the Committee shall have the exclusive right to interpret, construe and
administer the Plan, to select the Eligible Persons who shall receive an Award,
and to act in all matters pertaining to the grant of an Award and the
determination and interpretation of the provisions of the related Award
Agreement, including, without limitation, the determination of the number of
shares subject to Stock Options and the Option Period(s) and Option Price(s)
thereof, the number of shares of Restricted Stock or shares subject to Stock
Awards or Performance Shares subject to an Award, the vesting periods (if any)
and the form, terms, conditions and duration of each Award, and any amendment
thereof consistent with the provisions of the Plan. All acts, determinations and
decisions of the Committee made or taken pursuant to the Plan or with respect to
any questions arising in connection with the administration and interpretation
of the Plan or any Award Agreement, including the severability of any and all of
the provisions thereof, shall be conclusive, final and binding upon all
Participants, Eligible Persons and their beneficiaries.
3.4 The Committee may adopt such rules, regulations and procedures of
general application for the administration of this Plan as it deems appropriate.
3.5 Without limiting the provisions of this Article III, and subject to the
provisions of Article X, the Committee is authorized to take such action as it
determines to be necessary or advisable, and fair and equitable to Participants
and to the Corporation, with respect to an outstanding Award in the event of a
Change of Control as described in Article X or other similar event. Such action
may include, but shall not be limited to, establishing, amending or waiving the
form, terms, conditions and duration of an Award and the related Award
Agreement, so as to provide for earlier, later, extended or additional times for
exercise or payments, differing methods for calculating payments, alternate
forms and amounts of payment, an accelerated release of restrictions or other
modifications. The Committee may take such actions pursuant to this Section 3.5
by adopting rules and regulations of general applicability to all Participants
or to certain categories of Participants, by including, amending or waiving
terms and conditions in an Award and the related Award Agreement, or by taking
action with respect to individual Participants from time to time.
3.6 Subject to the provisions of Section 3.11, the aggregate number of
shares of Common Stock which may be issued pursuant to Awards under the Plan
shall be one million seven hundred thousand(1,700,000) shares (after giving
effect to a 1-for-10 reverse split effective April 16, 1999). Such shares of
Common Stock shall be made available from authorized and unissued shares of the
Corporation. The maximum number of shares which may be subject to awards granted
under the Plan to any individual in any calendar year is 400,000.
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(a) For all purposes under the Plan, each Performance Share awarded shall
be counted as one share of Common Stock subject to an Award.
(b) If, for any reason, any shares of Common Stock (including shares of
Common Stock subject to Performance Shares) that have been awarded or are
subject to issuance or purchase pursuant to Awards outstanding under the Plan
are not delivered or purchased, or are reacquired by the Corporation, for any
reason, including but not limited to a forfeiture of Restricted Stock or failure
to earn Performance Shares or the termination, expiration or cancellation of a
Stock Option, or any other termination of an Award without payment being made in
the form of shares of Common Stock (whether or not Restricted Stock), such
shares of Common Stock shall not be charged against the aggregate number of
shares of Common Stock available for Award under the Plan and shall again be
available for Awards under the Plan. In no event, however, may Common Stock that
is surrendered or withheld to pay the exercise price of a Stock Option or to
satisfy tax withholding requirements be available for future grants under the
Plan.
(c) The foregoing subsections (a) and (b) of this Section 3.6 shall be
subject to any limitations provided by the Code or by Rule 16b-3 under the Act
or by any other applicable law, rule or regulation.
3.7 Each Award granted under the Plan shall be evidenced by a written Award
Agreement, which shall be subject to and shall incorporate (by reference or
otherwise) the applicable terms and conditions of the Plan and shall include any
other terms and conditions (not inconsistent with the Plan) required by the
Committee.
3.8 The Corporation shall not be required to issue or deliver any
certificates for shares of Common Stock under the Plan prior to:
(a) any required approval of the Plan by the shareholders of the
Corporation; and
(b) the completion of any registration or qualification of such shares of
Common Stock under any federal or state law, or any ruling or regulation of any
governmental body that the Corporation shall, in its sole discretion, determine
to be necessary or advisable.
3.9 The Committee may require any Participant acquiring shares of Common
Stock pursuant to any Award under the Plan to represent to and agree with the
Corporation in writing that such person is acquiring the shares of Common Stock
for investment purposes and without a view to resale or distribution thereof.
Shares of Common Stock issued and delivered under the Plan shall also be subject
to such stop-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, any stock exchange upon which the Common Stock is then
listed and any applicable federal or state laws, and the Committee may cause a
legend or legends to be placed on the certificate or certificates representing
any such shares to make appropriate reference to any such restrictions. In
making such determination, the Committee may rely upon an opinion of counsel for
the Corporation.
3.10 Except as otherwise expressly provided in the Plan or in an Award
Agreement with respect to an Award, no Participant shall have any right as a
shareholder of the Corporation with respect to any shares of Common Stock
subject to such Participant's Award except to the extent that, and until, one or
more certificates representing such shares of Common Stock shall have been
delivered to the Participant. No shares shall be required to be issued, and no
certificates shall be required to be delivered, under the Plan unless and until
all of the terms and conditions applicable to such Award shall have, in the sole
discretion of the Committee, been satisfied in full and any restrictions shall
have lapsed in full, and unless and until all of the requirements of law and of
all regulatory bodies having jurisdiction over the offer and sale, or issuance
and delivery, of the shares shall have been fully complied with.
3.11 The total amount of shares with respect to which Awards may be granted
under the Plan and rights of outstanding Awards (both as to the number of shares
subject to the outstanding Awards and the Option Price(s) or other purchase
price(s) of such shares, as applicable) shall be appropriately adjusted for any
increase or decrease in the number of outstanding shares of Common Stock of the
Corporation resulting from payment of a stock dividend on the Common Stock, a
stock split or subdivision or combination of shares of the Common Stock, or a
reorganization or reclassification of the Common Stock, or any other change in
the structure of shares of the Common Stock. The foregoing adjustments and the
manner of application of the foregoing provisions shall be determined by the
Committee in its sole discretion. Any such adjustment may provide for the
elimination of any fractional shares which might otherwise become subject to an
Award. All adjustments made as the result of the foregoing in respect of each
Incentive Stock Option shall be made so that such Incentive Stock Option shall
continue to be an Incentive Stock Option, as defined in Section 422 of the Code.
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3.12 The members of the Committee shall be entitled to indemnification by
the Corporation in the manner and to the extent set forth in the Corporation's
Bylaws or as otherwise provided from time to time regarding indemnification of
Directors.
3.13 The Committee shall be authorized to make adjustments in any
performance based criterium or in the other terms and conditions of outstanding
Awards in recognition of unusual or nonrecurring events affecting the
Corporation (or any Subsidiary, if applicable) or its financial statements or
changes in applicable laws, regulations or accounting principles. The Committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Plan or any Award Agreement in the manner and to the extent it shall deem
necessary or desirable to reflect any such adjustment. In the event the
Corporation (or any Subsidiary, if applicable) shall assume outstanding employee
benefit awards or the right or obligation to make future such awards in
connection with the acquisition of another corporation or business entity, the
Committee may, in its sole discretion, make such adjustments in the terms of
outstanding Awards under the Plan as it shall deem appropriate.
3.14 Subject to the express provisions of the Plan, the Committee shall
have full power and authority to determine whether, to what extent and under
what circumstances any outstanding Award shall be terminated, canceled,
forfeited or suspended. Notwithstanding the foregoing or any other provision of
the Plan or an Award Agreement, all Awards to any Participant that are subject
to any restriction or have not been earned or exercised in full by the
Participant shall be terminated and canceled if the Participant is terminated
for cause, as determined by the Committee in its sole discretion.
3.15 In addition to, and not in limitation of, the right of the Committee
to grant Awards to Eligible Persons under this Plan the full Board of Directors
may from time to time grant Awards to Eligible Persons pursuant to the terms and
conditions of this Plan, subject to the requirements of the Code, Rule 16b-3
under the Act or any other applicable law, rule or regulation. In connection
with any such grants, the Board of Directors shall have all of the power and
authority of the Committee to determine the Eligible Persons to whom such Awards
shall be granted and the other terms and conditions of such Awards.
3.16 Notwithstanding anything herein to the contrary, subject to the
discretion of the full Board of Directors to make grants from time to time to
Non-Employee Directors, grants of Awards to Non-Employee Directors shall only be
made pursuant to the following formula: Each Non-Employee Director serving in
such capacity immediately following the first annual shareholders meeting of the
Corporation following the Effective Date of this Plan shall automatically be
granted a number of Nonqualified Stock Options equal to 5,000 multiplied by the
number of years remaining in said Non-Employee Director's term as a Director.
Thereafter, each Non-Employee Director who is initially elected to serve in such
capacity or who is reelected to serve in such capacity at each subsequent
shareholders meeting shall automatically be granted a number of Nonqualified
Stock Options equal to 5,000 multiplied by the number of years remaining in said
Non-Employee Director's term as a Director. All such Nonqualified Stock Options
shall vest ratably over the balance of the term of each Non-Employee Director
with an amount equal to the total number of Nonqualified Stock Options granted
to each such Non-Employee Director divided by the total number of years
remaining in each such Director's term vesting on the date of grant and a like
amount vesting on each subsequent anniversary of the grant provided that such
Non-Employee Director continues to serve in such capacity on each such
anniversary; provided, however, that if a Non-Employee Director's service in
such capacity is terminated due to death or disability (as determined in the
discretion of the Board), then the vesting of such Nonqualified Stock Options
shall be accelerated upon the occurrence of such event. The date on which each
Non-Employee Director is elected, or reelected, in such capacity by the
shareholders of the Corporation shall constitute the Grant Date for all
Nonqualified Stock Options granted pursuant to this Section 3.16 and the Option
Price shall be fixed at the Fair Market Value of the Common Stock on the Grant
Date. The Option Period of each Nonqualified Stock Option granted pursuant to
this Section 3.16 shall be ten years from the Grant Date. No additional grants
of stock options under any prior plans of the Corporation shall be made after
the Effective Date of this Plan.
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ARTICLE IV -- INCENTIVE STOCK OPTIONS
4.1 The Committee, in its sole discretion, may from time to time on or
after the Effective Date grant Incentive Stock Options to Eligible Employees,
subject to the provisions of this Article IV and Articles III and VI and subject
to the following conditions:
(a) Incentive Stock Options shall be granted only to Eligible Employees,
each of whom may be granted one or more of such Incentive Stock Options at such
time or times determined by the Committee.
(b) The Option Price per share of Common Stock for an Incentive Stock
Option shall be set in the Award Agreement, but shall not be less than (i) one
hundred percent (100%) of the Fair Market Value of the Common Stock at the Grant
Date, or (ii) in the case of an Incentive Stock Option granted to a Ten Percent
Stockholder, one hundred ten percent (110%) of the Fair Market Value of the
Common Stock at the Grant Date.
(c) An Incentive Stock Option may be exercised in full or in part from time
to time within ten (10) years from the Grant Date, or such shorter period as may
be specified by the Committee as the Option Period and set forth in the Award
Agreement; provided, however, that, in the case of an Incentive Stock Option
granted to a Ten Percent Stockholder, such period shall not exceed five years
from the Grant Date; and further, provided that, in any event, the Incentive
Stock Option shall lapse and cease to be exercisable upon a Termination of
Service or within such period following a Termination of Service as shall have
been determined by the Committee and set forth in the related Award Agreement;
and provided, further, that such period following a Termination of Service shall
not exceed three (3) months unless employment shall have terminated:
(i) as a result of Disability, in which event such period shall not exceed
one year after the date of Disability; or
(ii) as a result of death, or if death shall have occurred following a
Termination of Service (other than as a result of Disability) and during the
period that the Incentive Stock Option was still exercisable, in which event
such period may not exceed one year after the date of death; and provided,
further, that such period following a Termination of Service shall in no event
extend beyond the original Option Period of the Incentive Stock Option.
(d) The aggregate Fair Market Value of the shares of Common Stock with
respect to which any incentive stock options (whether under this Plan or any
other plan established by the Corporation) are first exercisable during any
calendar year by any Eligible Employee shall not exceed one hundred thousand
dollars ($100,000), determined based on the Fair Market Value(s) of such shares
as of their respective grant dates; provided, however, that to the extent
permitted under Section 422 of the Code:
(i) if the aggregate Fair Market Values of the shares of Common Stock with
respect to which incentive stock options are first exercisable during any
calendar year (whether such Incentive Stock Options are granted under this Plan
or any other plan established by the Corporation) exceeds one hundred thousand
dollars ($100,000), such excess shall be treated as a Nonqualified Stock Option;
(ii) if a Participant's employment is terminated by reason of death,
Disability or Retirement and the portion of any incentive stock option that is
otherwise exercisable during the post-termination period applied without regard
to the one hundred thousand dollar ($100,000) limitation contained in Section
422 of the Code is greater than the portion of such option that is immediately
exercisable as an Incentive Stock Option during such post-termination period
under Section 422, such excess shall be treated as a Nonqualified Stock Option;
and (iii) if the exercise of an Incentive Stock Option is accelerated by reason
of a Change of Control, any portion of such Award that is not exercisable as an
incentive stock option by reason of the one hundred thousand dollar ($100,000)
limitation contained in Section 422 of the Code shall be treated as a
Nonqualified Stock Option.
(e) No Incentive Stock Options may be granted more than ten (10) years from
the Effective Date.
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(f) The Award Agreement for each Incentive Stock Option shall provide that
the Participant shall notify the Corporation if such Participant sells or
otherwise transfers any shares of Common Stock acquired upon exercise of the
Incentive Stock Option within two (2) years of the Grant Date of such Incentive
Stock Option or within one (1) year of the date such shares were acquired upon
the exercise of such Incentive Stock Option.
4.2 Subject to the limitations of Section 3.6, the maximum number of shares
of Common Stock subject to Incentive Stock Option Awards shall be the maximum
number of shares available for Awards under the Plan.
4.3 The Committee may provide for any other terms and conditions which it
determines should be imposed for an Incentive Stock Option to qualify under
Section 422 of the Code, as well as any other terms and conditions not
inconsistent with this Article IV or Articles III or VI, as determined in its
sole discretion and set forth in the Award Agreement for such Incentive Stock
Option.
4.4 Each provision of this Article IV and of each Incentive Stock Option
granted hereunder shall be construed in accordance with the provisions of
Section 422 of the Code, and any provision hereof that cannot be so construed
shall be disregarded.
ARTICLE V -- NONQUALIFIED STOCK OPTIONS
5.1 The Committee, in its sole discretion, may from time to time on or
after the Effective Date grant Nonqualified Stock Options to Eligible Persons,
subject to the provisions of this Article V and Articles III and VI and subject
to the following conditions:
(a) Nonqualified Stock Options may be granted to any Eligible Persons, each
of whom may be granted one or more of such Nonqualified Stock Options, at such
time or times determined by the Committee.
(b) The Option Price per share of Common Stock for a Nonqualified Stock
Option shall be set in the Award Agreement and may be less than one hundred
percent (100%) of the Fair Market Value of the Common Stock at the Grant Date.
(c) A Nonqualified Stock Option may be exercised in full or in part from
time to time within the Option Period specified by the Committee and set forth
in the Award Agreement; provided, however, that, in any event, the Nonqualified
Stock Option shall lapse and cease to be exercisable upon a Termination of
Service or within such period following a Termination of Service as shall have
been determined by the Committee and set forth in the related Award Agreement.
5.2 The Committee may provide for any other terms and conditions for a
Nonqualified Stock Option not inconsistent with this Article V or Articles III
or VI, as determined in its sole discretion and set forth in the Award Agreement
for such Nonqualified Stock Option.
ARTICLE VI -- INCIDENTS OF STOCK OPTIONS
6.1 Each Stock Option shall be granted subject to such terms and
conditions, if any, not inconsistent with this Plan, as shall be determined by
the Committee and set forth in the related Award Agreement, including any
provisions as to continued employment as consideration for the grant or exercise
of such Stock Option and any provisions which may be advisable to comply with
applicable laws, regulations or rulings of any governmental authority.
6.2 Except as hereinafter described, a Stock Option shall not be
transferable by the Participant other than by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of the Participant
only by the Participant or the Participant's guardian or legal representative.
In the event of the death of a Participant, any unexercised Stock Options may be
exercised to the extent otherwise provided herein or in such Participant's Award
Agreement by the executor or personal representative of such Participant's
estate or by any person who acquired the right to exercise such Stock Options by
bequest under the Participant's will or by inheritance. The Committee, in its
sole discretion, may at any time permit a Participant to transfer a Nonqualified
Stock Option for no consideration to or for the benefit of one or more members
of the Participant's Immediate Family (including, without limitation, to a trust
for the benefit of the Participant and/or one or more members of such
Participant's Immediate Family or a corporation, partnership or limited
liability company established and controlled by the Participant and/or one or
more members of such Participant's Immediate Family), subject to such limits as
the Committee may establish. The transferee of such Nonqualified Stock Option
shall remain subject to all terms and conditions applicable to such Nonqualified
Stock Option prior to such transfer. The foregoing right to transfer the
Nonqualified Stock Option, if granted by the Committee, shall apply to the right
to consent to amendments to the Award Agreement.
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6.3 Shares of Common Stock purchased upon exercise of a Stock Option shall
be paid for in such amounts, at such times and upon such terms as shall be
determined by the Committee, subject to limitations set forth in the Stock
Option Award Agreement. The Committee may, in its sole discretion, permit the
exercise of a Stock Option by payment in cash or by tendering shares of Common
Stock (either by actual delivery of such shares or by attestation), or any
combination thereof, as determined by the Committee. In the sole discretion of
the Committee, payment in shares of Common Stock also may be made with shares
received upon the exercise or partial exercise of the Stock Option, whether or
not involving a series of exercises or partial exercises and whether or not
share certificates for such shares surrendered have been delivered to the
Participant. The Committee also may, in its sole discretion, permit the payment
of the exercise price of a Stock Option by the voluntary surrender of all or a
portion of the Stock Option. Shares of Common Stock previously held by the
Participant and surrendered in payment of the Option Price of a Stock Option
shall be valued for such purpose at the Fair Market Value thereof on the date
the Stock Option is exercised.
6.4 No cash dividends shall be paid on shares of Common Stock subject to
unexercised Stock Options.
6.5 The Committee may permit the voluntary surrender of all or a portion of
any Stock Option granted under the Plan to be conditioned upon the granting to
the Participant of a new Stock Option for the same or a different number of
shares of Common Stock as the Stock Option surrendered, or may require such
voluntary surrender as a condition precedent to a grant of a new Stock Option to
such Participant. Subject to the provisions of the Plan, such new Stock Option
shall be exercisable at such Option Price, during such Option Period and on such
other terms and conditions as are specified by the Committee at the time the new
Stock Option is granted. Upon surrender, the Stock Options surrendered shall be
canceled and the shares of Common Stock previously subject to them shall be
available for the grant of other Stock Options.
6.6 The Committee may at any time offer to purchase a Participant's
outstanding Stock Option for a payment equal to the value of such Stock Option
payable in cash, shares of Common Stock or Restricted Stock or other property
upon surrender of the Participant's Stock Option, based on such terms and
conditions as the Committee shall establish and communicate to the Participant
at the time that such offer is made.
6.7 The Committee shall have the discretion, exercisable either at the time
the Award is granted or at the time the Participant discontinues employment, to
establish as a provision applicable to the exercise of one or more Stock Options
that, during a limited period of exercisability following a Termination of
Service, the Stock Option may be exercised not only with respect to the number
of shares of Common Stock for which it is exercisable at the time of the
Termination of Service but also with respect to one or more subsequent
installments for which the Stock Option would have become exercisable had the
Termination of Service not occurred.
ARTICLE VII -- RESTRICTED STOCK
7.1 The Committee, in its sole discretion, may from time to time on or
after the Effective Date award shares of Restricted Stock to Eligible Persons as
a reward for past service and an incentive for the performance of future
services that will contribute materially to the successful operation of the
Corporation and its Subsidiaries, subject to the terms and conditions set forth
in this Article VII.
7.2 The Committee shall determine the terms and conditions of any Award of
Restricted Stock, which shall be set forth in the related Award Agreement,
including without limitation:
(a) the purchase price, if any, to be paid for such Restricted Stock, which
may be zero, subject to such minimum consideration as may be required by
applicable law;
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(b) the duration of the Restriction Period or Restriction Periods with
respect to such Restricted Stock and whether any events may accelerate or delay
the end of such Restriction Period(s);
(c) the circumstances upon which the restrictions or limitations shall
lapse, and whether such restrictions or limitations shall lapse as to all shares
of Restricted Stock at the end of the Restriction Period or as to a portion of
the shares of Restricted Stock in installments during the Restriction Period by
means of one or more vesting schedules;
(d) whether such Restricted Stock is subject to repurchase by the
Corporation or to a right of first refusal at a predetermined price or if the
Restricted Stock may be forfeited entirely under certain conditions;
(e) whether any performance goals may apply to a Restriction Period to
shorten or lengthen such period; and
(f) whether dividends and other distributions with respect to such
Restricted Stock are to be paid currently to the Participant or withheld by the
Corporation for the account of the Participant.
7.3 Awards of Restricted Stock must be accepted within a period of thirty
(30) days after the Grant Date (or such shorter or longer period as the
Committee may specify at such time) by executing an Award Agreement with respect
to such Restricted Stock and tendering the purchase price, if any. A prospective
recipient of an Award of Restricted Stock shall not have any rights with respect
to such Award, unless such recipient has executed an Award Agreement with
respect to such Restricted Stock, has delivered a fully executed copy thereof to
the Committee and has otherwise complied with the applicable terms and
conditions of such Award.
7.4 In the sole discretion of the Committee and as set forth in the Award
Agreement for an Award of Restricted Stock, all shares of Restricted Stock held
by a Participant and still subject to restrictions shall be forfeited by the
Participant upon the Participant's Termination of Service and shall be
reacquired, canceled and retired by the Corporation. Notwithstanding the
foregoing, unless otherwise provided in an Award Agreement with respect to an
Award of Restricted Stock, in the event of the death, Disability or Retirement
of a Participant during the Restriction Period, or in other cases of special
circumstances (including hardship or other special circumstances of a
Participant whose employment is involuntarily terminated), the Committee may
elect to waive in whole or in part any remaining restrictions with respect to
all or any part of such Participant's Restricted Stock, if it finds that a
waiver would be appropriate.
7.5 Except as otherwise provided in this Article VII, no shares of
Restricted Stock received by a Participant shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period.
7.6 Upon an Award of Restricted Stock to a Participant, a certificate or
certificates representing the shares of such Restricted Stock will be issued to
and registered in the name of the Participant. Unless otherwise determined by
the Committee, such certificate or certificates will be held in custody by the
Corporation until (i) the Restriction Period expires and the restrictions or
limitations lapse, in which case one or more certificates representing such
shares of Restricted Stock that do not bear a restrictive legend (other than any
legend as required under applicable federal or state securities laws) shall be
delivered to the Participant, or (ii) a prior forfeiture by the Participant of
the shares of Restricted Stock subject to such Restriction Period, in which case
the Corporation shall cause such certificate or certificates to be canceled and
the shares represented thereby to be retired, all as set forth in the
Participant's Award Agreement. It shall be a condition of an Award of Restricted
Stock that the Participant deliver to the Corporation a stock power endorsed in
blank relating to the shares of Restricted Stock to be held in custody by the
Corporation.
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7.7 Except as provided in this Article VII or in the related Award
Agreement, a Participant receiving an Award of shares of Restricted Stock Award
shall have, with respect to such shares, all rights of a shareholder of the
Corporation, including the right to vote the shares and the right to receive any
distributions, unless and until such shares are otherwise forfeited by such
Participant; provided, however, the Committee may require that any cash
dividends with respect to such shares of Restricted Stock be automatically
reinvested in additional shares of Restricted Stock subject to the same
restrictions as the underlying Award, or may require that cash dividends and
other distributions on Restricted Stock be withheld by the Corporation or its
Subsidiaries for the account of the Participant. The Committee shall determine
whether interest shall be paid on amounts withheld, the rate of any such
interest, and the other terms applicable to such withheld amounts.
ARTICLE VIII -- STOCK AWARDS
8.1 The Committee, in its sole discretion, may from time to time on or
after the Effective Date grant Stock Awards to Eligible Persons in payment of
compensation that has been earned or as compensation to be earned, including
without limitation compensation awarded or earned concurrently with or prior to
the grant of the Stock Award, subject to the terms and conditions set forth in
this Article VIII.
8.2 For the purposes of this Plan, in determining the value of a Stock
Award, all shares of Common Stock subject to such Stock Award shall be valued at
not less than one hundred percent (100%) of the Fair Market Value of such shares
of Common Stock on the Grant Date of such Stock Award, regardless of when such
shares of Common Stock are issued and certificates representing such shares are
delivered to the Participant.
8.3 Unless otherwise determined by the Committee and set forth in the
related Award Agreement, shares of Common Stock subject to a Stock Award will be
issued, and one or more certificates representing such shares will be delivered,
to the Participant as soon as practicable following the Grant Date of such Stock
Award. Upon the issuance of such shares and the delivery of one or more
certificates representing such shares to the Participant, such Participant shall
be and become a shareholder of the Corporation fully entitled to receive
dividends, to vote and to exercise all other rights of a shareholder of the
Corporation. Notwithstanding any other provision of this Plan, unless the
Committee expressly provides otherwise with respect to a Stock Award, as set
forth in the related Award Agreement, no Stock Award shall be deemed to be an
outstanding Award for purposes of the Plan.
ARTICLE IX -- PERFORMANCE SHARES
9.1 The Committee, in its sole discretion, may from time to time on or
after the Effective Date award Performance Shares to Eligible Persons as an
incentive for the performance of future services that will contribute materially
to the successful operation of the Corporation and its Subsidiaries, subject to
the terms and conditions set forth in this Article IX.
9.2 The Committee shall determine the terms and conditions of any Award of
Performance Shares, which shall be set forth in the related Award Agreement,
including without limitation:
(a) the purchase price, if any, to be paid for such Performance Shares,
which may be zero, subject to such minimum consideration as may be required by
applicable law;
(b) the performance period (the "Performance Period") and/or performance
objectives (the "Performance Objectives") applicable to such Awards;
(c) the number of Performance Shares that shall be paid to the Participant
if the applicable Performance Objectives are exceeded or met in whole or in
part; and
(d) the form of settlement of a Performance Share.
9.3 At any date, each Performance Share shall have a value equal to the
Fair Market Value of a share of Common Stock.
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9.4 Performance Periods may overlap, and Participants may participate
simultaneously with respect to Performance Shares for which different
Performance Periods are prescribed.
9.5 Performance Objectives may vary from Participant to Participant and
between Awards and shall be based upon such performance criteria or combination
of factors as the Committee may deem appropriate, including, but not limited to,
minimum earnings per share or return on equity. If during the course of a
Performance Period there shall occur significant events which the Committee
expects to have a substantial effect on the applicable Performance Objectives
during such period, the Committee may revise such Performance Objectives.
9.6 In the sole discretion of the Committee and as set forth in the Award
Agreement for an Award of Performance Shares, all Performance Shares held by a
Participant and not earned shall be forfeited by the Participant upon the
Participant's Termination of Service. Notwithstanding the foregoing, unless
otherwise provided in an Award Agreement with respect to an Award of Performance
Shares, in the event of the death, Disability or Retirement of a Participant
during the applicable Performance Period, or in other cases of special
circumstances (including hardship or other special circumstances of a
Participant whose employment is involuntarily terminated), the Committee may
determine to make a payment in settlement of such Performance Shares at the end
of the Performance Period, based upon the extent to which the Performance
Objectives were satisfied at the end of such period and pro rated for the
portion of the Performance Period during which the Participant was employed by
the Corporation or a Subsidiary; provided, however, that the Committee may
provide for an earlier payment in settlement of such Performance Shares in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable.
9.7 The settlement of a Performance Share shall be made in cash, whole
shares of Common Stock or a combination thereof and shall be made as soon as
practicable after the end of the applicable Performance Period. Notwithstanding
the foregoing, the Committee in its sole discretion may allow a Participant to
defer payment in settlement of Performance Shares on terms and conditions
approved by the Committee and set forth in the related Award Agreement entered
into in advance of the time of receipt or constructive receipt of payment by the
Participant.
9.8 Performance Shares shall not be transferable by the Participant. The
Committee shall have the authority to place additional restrictions on the
Performance Shares including, but not limited to, restrictions on transfer of
any shares of Common Stock that are delivered to a Participant in settlement of
any Performance Shares.
ARTICLE X -- CHANGES OF CONTROL OR OTHER FUNDAMENTAL CHANGES
10.1 Upon the occurrence of a Change of Control and unless otherwise
provided in the Award Agreement with respect to a particular Award:
(a) all outstanding Stock Options shall become immediately exercisable in
full, subject to any appropriate adjustments in the number of shares subject to
the Stock Option and the Option Price, and shall remain exercisable for the
remaining term of such Stock Option, regardless of any provision in the related
Award Agreement limiting the exercisability of such Stock Option or any portion
thereof for any length of time;
(b) all outstanding Performance Shares with respect to which the applicable
Performance Period has not been completed shall be paid out as soon as
practicable as follows:
(i) all Performance Objectives applicable to the Award of Performance
Shares shall be deemed to have been satisfied to the extent necessary to
earn one hundred percent (100%) of the Performance Shares covered by the
Award;
(ii) the applicable Performance Period shall be deemed to have been
completed upon occurrence of the Change of Control;
(iii) the payment to the Participant in settlement of the Performance
Shares shall be the amount determined by the Committee, in its sole
discretion, or in the manner stated in the Award Agreement, as multiplied
by a fraction, the numerator of which is the number of full calendar months
of the applicable Performance Period that have elapsed prior to occurrence
of the Change of Control, and the denominator of which is the total number
of months in the original Performance Period; and
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(iv) upon the making of any such payment, the Award Agreement as to
which it relates shall be deemed terminated and of no further force and
effect.
(c) all outstanding shares of Restricted Stock with respect to which the
restrictions have not lapsed shall be deemed vested, and all such restrictions
shall be deemed lapsed and the Restriction Period ended.
10.2 Anything contained herein to the contrary notwithstanding, upon the
dissolution or liquidation of the Corporation, each Award granted under the Plan
and then outstanding shall terminate; provided, however, that following the
adoption of a plan of dissolution or liquidation, and in any event prior to the
effective date of such dissolution or liquidation, each such outstanding Award
granted hereunder shall be exercisable in full and all restrictions shall lapse,
to the extent set forth in Section 10.1(a), (b) and (c) above.
10.3 After the merger of one or more corporations into the Corporation or
any Subsidiary, any merger of the Corporation into another corporation, any
consolidation of the Corporation or any Subsidiary of the Corporation and one or
more corporations, or any other corporate reorganization of any form involving
the Corporation as a party thereto and involving any exchange, conversion,
adjustment or other modification of the outstanding shares of the Common Stock,
each Participant shall, at no additional cost, be entitled, upon any exercise of
such Participant's Stock Option, to receive, in lieu of the number of shares as
to which such Stock Option shall then be so exercised, the number and class of
shares of stock or other securities or such other property to which such
Participant would have been entitled to pursuant to the terms of the agreement
of merger or consolidation or reorganization, if at the time of such merger or
consolidation or reorganization, such Participant had been a holder of record of
a number of shares of Common Stock equal to the number of shares as to which
such Stock Option shall then be so exercised. Comparable rights shall accrue to
each Participant in the event of successive mergers, consolidations or
reorganizations of the character described above. The Committee may, in its sole
discretion, provide for similar adjustments upon the occurrence of such events
with regard to other outstanding Awards under this Plan. The foregoing
adjustments and the manner of application of the foregoing provisions shall be
determined by the Committee in its sole discretion. Any such adjustment may
provide for the elimination of any fractional shares which might otherwise
become subject to an Award. All adjustments made as the result of the foregoing
in respect of each Incentive Stock Option shall be made so that such Incentive
Stock Option shall continue to be an Incentive Stock Option, as defined in
Section 422 of the Code.
ARTICLE XI -- AMENDMENT AND TERMINATION
11.1 Subject to the provisions of Section 11.2, the Board of Directors,
upon recommendation of the Committee or otherwise, at any time and from time to
time may amend or terminate the Plan as may be necessary or desirable to
implement or discontinue the Plan or any provision hereof. To the extent
required by the Act or the Code, however, no amendment, without approval by the
Corporation's shareholders, shall:
(a) materially alter the group of persons eligible to participate in
the Plan;
(b) except as provided in Section 3.6, increase the maximum number of
shares of Common Stock that are available for Awards under the Plan;
(c) extend the period during which Incentive Stock Option Awards may
be granted beyond January 8, 2008; or
(d) alter the class of individuals eligible to receive an Incentive
Stock Option or increase the limit on Incentive Stock Options set forth in
Section 4.1(d) or the value of shares of Common Stock for which an Eligible
Employee may be granted an Incentive Stock Option.
11.2 No amendment to or discontinuance of the Plan or any provision hereof
by the Board of Directors or the shareholders of the Corporation shall, without
the written consent of the Participant, adversely affect (in the sole discretion
of the Committee) any Award theretofore granted to such Participant under this
Plan; provided, however, that the Committee retains the right and power to:
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(a) annul any Award if the Participant is terminated for cause as
determined by the Committee; and
(b) convert any outstanding Incentive Stock Option to a Nonqualified Stock
Option.
11.3 If a Change of Control has occurred, no amendment or termination shall
impair the rights of any person with respect to an outstanding Award as provided
in Article X.
ARTICLE XII -- MISCELLANEOUS PROVISIONS
12.1 Nothing in the Plan or any Award granted hereunder shall confer upon
any Participant any right to continue in the employ of the Corporation or its
Subsidiaries or to serve as a Director or shall interfere in any way with the
right of the Corporation or its Subsidiaries or the shareholders of the
Corporation, as applicable, to terminate the employment of a Participant or to
release or remove a Director at any time. Unless specifically provided
otherwise, no Award granted under the Plan shall be deemed salary or
compensation for the purpose of computing benefits under any employee benefit
plan or other arrangement of the Corporation or its Subsidiaries for the benefit
of their respective employees unless the Corporation shall determine otherwise.
No Participant shall have any claim to an Award until it is actually granted
under the Plan and an Award Agreement has been executed and delivered to the
Corporation. To the extent that any person acquires a right to receive payments
from the Corporation under the Plan, such right shall, except as otherwise
provided by the Committee, be no greater than the right of an unsecured general
creditor of the Corporation. All payments to be made hereunder shall be paid
from the general funds of the Corporation, and no special or separate fund shall
be established and no segregation of assets shall be made to assure payment of
such amounts, except as provided in Article VII with respect to Restricted Stock
and except as otherwise provided by the Committee.
12.2 The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required. Any provision herein
relating to compliance with Rule 16b-3 under the Act shall not be applicable
with respect to participation in the Plan by Participants who are not subject to
Section 16 of the Act.
12.3 The terms of the Plan shall be binding upon the Corporation, its
successors and assigns.
12.4 Neither a Stock Option nor any other type of equity-based compensation
provided for hereunder shall be transferable except as provided for in Section
6.2. In addition to the transfer restrictions otherwise contained herein,
additional transfer restrictions shall apply to the extent required by federal
or state securities laws. If any Participant makes such a transfer in violation
hereof, any obligation hereunder of the Corporation to such Participant shall
terminate immediately.
12.5 This Plan and all actions taken hereunder shall be governed by the
laws of the State of New Jersey.
12.6 Each Participant exercising an Award hereunder agrees to give the
Committee prompt written notice of any election made by such Participant under
Section 83(b) of the Code, or any similar provision thereof.
12.7 If any provision of this Plan or an Award Agreement is or becomes or
is deemed invalid, illegal or unenforceable in any jurisdiction, or would
disqualify the Plan or any Award Agreement under any law deemed applicable by
the Committee, such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of the Plan or
the Award Agreement, it shall be stricken, and the remainder of the Plan or the
Award Agreement shall remain in full force and effect.
12.8 The grant of an Award pursuant to this Plan shall not affect in any
way the right or power of the Corporation or any of its Subsidiaries to make
adjustments, reclassification, reorganizations, or changes of its capital or
business structure, or to merge or consolidate, or to dissolve, liquidate or
sell, or to transfer all or part of its business or assets.
12.9 The Plan is not subject to the provisions of ERISA or qualified under
Section 401(a) of the Code.
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12.10 If a Participant is required to pay to the Corporation an amount with
respect to income and employment tax withholding obligations in connection with
(i) the exercise of a Nonqualified Stock Option, (ii) certain dispositions of
Common Stock acquired upon the exercise of an Incentive Stock Option, or (iii)
the receipt of Common Stock pursuant to any other Award, then the issuance of
Common Stock to such Participant shall not be made (or the transfer of shares by
such Participant shall not be required to be effected, as applicable) unless
such withholding tax or other withholding liabilities shall have been satisfied
in a manner acceptable to the Corporation. The Committee, in its sole discretion
and subject to such rules as it may adopt, may permit the Participant to satisfy
such obligation, in whole or in part, by making an irrevocable election that a
portion of the total Fair Market Value of the shares of Common Stock be paid in
the form of cash in lieu of the issuance of Common Stock and that such cash
payment be applied to the satisfaction of the withholding obligations. The
amount to be withheld shall not exceed the statutory minimum federal and state
income and employment tax liability arising from the transfer of the Common
Stock to the Participant. Notwithstanding any other provision of the Plan, any
election under this Section 12.10 is required to satisfy the applicable
requirements of Rule 16b-3 under the Act.
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APPENDIX K
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security or an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections (b) or
(c) hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of
his shares. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to
sec.228 or sec.253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date or the merger or
consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of
stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that
is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled
to receiver either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to
the date the notice is given, provided, that if the notice is given on
or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
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(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his
demand for appraisal and to accept the terms offered upon the merger
or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after his written request for such statement is received by the
surviving or resulting corporation or within 10 days after expiration
of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such service
file in the office of the Register in Chancery in which the petition
was filed a duly verified list containing the names and addresses of
all stockholders who have demanded payment for their shares and with
whom agreements as to the value of their shares have not been reached
by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to
the surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine
the stockholders who have complied with this section and who have
become entitled to appraisal rights. The Court may require the
stockholders who have demanded an appraisal for their shares and who
hold stock represented by certificates to submit their certificates of
stock to the Register in Chancery for notation thereon of the pendency
of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation, together with a fair rate
of interest, if any, to be paid upon the amount determined to be the
fair value. In determining such fair value, the Court shall take into
account all relevant factors. In determining the fair rate of
interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would
have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the
final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
resulting corporation pursuant to subsection (f) of this section and
who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or
of any state.
(j) The costs of the proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as
provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however,
that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective
date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall
cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such
terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted
had they assented to the merger or consolidation shall have the status
of authorized and unissued shares of the surviving or resulting
corporation.
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APPENDIX L
NEW JERSEY BUSINESS CORPORATION ACT
14A:11-1. RIGHT OF SHAREHOLDERS TO DISSENT
(1) Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation otherwise provides
(i) a shareholder shall not have the right to dissent from any plan of
merger or consolidation with respect to shares
(A) of a class or series which is listed on a national securities exchange
or is held of record by not less than 1,000 holders on the record date fixed to
determine the shareholders entitled to vote upon the plan of merger or
consolidation; or
(B) for which, pursuant to the plan of merger or consolidation, he will
receive (x) cash, (y) shares, obligations or other securities which, upon
consummation of the merger or consolidation, will either be listed on a national
securities exchange or held of record by not less than 1,000 holders, or (z)
cash and such securities;
(ii) a shareholder of a surviving corporation shall not have the right to
dissent from a plan of merger, if the merger did not require for its approval
the vote of such shareholders as provided in section 14A:10-5.1 or in subsection
14A:10-3(4), 14A:10-7(2) or 14A:10-7(4); or
(b) Any sale, lease, exchange or other disposition of all or substantially
all of the assets of a corporation not in the usual or regular course of
business as conducted by such corporation, other than a transfer pursuant to
subsection (4) of N.J.S.14A:10-11, provided that, unless the certificate of
incorporation otherwise provides, the shareholder shall not have the right to
dissent
(i) with respect to shares of a class or series which, at the record date
fixed to determine the shareholders entitled to vote upon such transaction, is
listed on a national securities exchange or is held of record by not less than
1,000 holders; or
(ii) from a transaction pursuant to a plan of dissolution of the
corporation which provides for distribution of substantially all of its net
assets to shareholders in accordance with their respective interests within one
year after the date of such transaction, where such transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon consummation
of the plan of dissolution will either be listed on a national securities
exchange or held of record by not less than 1,000 holders; or
(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.
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(3) A shareholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
(4) A corporation may provide in its certificate of incorporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.
14A:11-2. NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF CERTIFICATES
(1) Whenever a vote is to be taken, either at a meeting of shareholders or
upon written consents in lieu of a meeting pursuant to section 14A:5-6, upon a
proposed corporate action from which a shareholder may dissent under section
14A:11-1, any shareholder electing to dissent from such action shall file with
the corporation before the taking of the vote of the shareholders on such
corporate action, or within the time specified in paragraph 14A:5-6(2)(b) or
14A:5-6(2)(c), as the case may be, if no meeting of shareholders is to be held,
a written notice of such dissent stating that he intends to demand payment for
his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall give written notice of the effective date of
such corporate action, by certified mail to each shareholder who filed written
notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for
or consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to
whom the corporation was required to give such notice and who has filed a
written notice of dissent pursuant to this section may make written demand on
the corporation, or, in the case of a merger or consolidation, on the surviving
or new corporation, for the payment of the fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to section 14A:10-5.1
or subsection 14A:10-7(4) and shareholder approval is not required under
subsections 14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the right to
dissent pursuant to section 14A:11-1 may, not later than 20 days after a copy or
summary of the plan of such merger and the statement required by subsection
14A:10-5.1(2) is mailed to such shareholder, make written demand on the
corporation or on the surviving corporation, for the payment of the fair value
of his shares.
(5) Whenever all the shares, or all the shares of a class or series, are to
be acquired by another corporation pursuant to section 14A:10-9, a shareholder
of the corporation whose shares are to be acquired may, not later than 20 days
after the mailing of notice by the acquiring corporation pursuant to paragraph
14A:10-9(3)(b), make written demand on the acquiring corporation for the payment
of the fair value of his shares.
(6) Not later than 20 days after demanding payment for his shares pursuant
to this section, the shareholder shall submit the certificate or certificates
representing his shares to the corporation upon which such demand has been made
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making a demand for payment of the
fair value thereof.
(7) Every notice or other communication required to be given or made by a
corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
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14A:11-3. "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR VALUE
(1) A shareholder who has made demand for the payment of his shares in the
manner prescribed by subsection 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder."
(2) Upon making such demand, the dissenting shareholder shall cease to have
any of the rights of a shareholder except the right to be paid the fair value of
his shares and any other rights of a dissenting shareholder under this Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) As of the day prior to the day of the meeting of shareholders at which
the proposed action was approved or as of the day prior to the day specified by
the corporation for the tabulation of consents to such action if no meeting of
shareholders was held; or
(b) In the case of a merger pursuant to section 14A:10-5.1 or subsection
14A:10-7(4) in which shareholder approval is not required, as of the day prior
to the day on which the board of directors approved the plan of merger; or
(c) In the case of an acquisition of all the shares or all the shares of a
class or series by another corporation pursuant to section 14A:10-9, as of the
day prior to the day on which the board of directors of the acquiring
corporation authorized the acquisition, or, if a shareholder vote was taken
pursuant to section 14A:10-12, as of the day provided in paragraph
14A:11-3(3)(a).
In all cases, "fair value" shall exclude any appreciation or depreciation
resulting from the proposed action.
14A:11-4. TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS
SHARES
(1) The right of a dissenting shareholder to be paid the fair value of his
shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as provided by
subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;
(b) his demand for payment is withdrawn with the written consent of the
corporation;
(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior Court
is commenced within the time provided in this Chapter;
(d) the Superior Court determines that the shareholder is not entitled to
payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of the
dissenting shareholder as a shareholder shall be reinstated as of the date of
the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.
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14A:11-5. RIGHTS OF DISSENTING SHAREHOLDER
(1) A dissenting shareholder may not withdraw his demand for payment of the
fair value of his shares without the written consent of the corporation.
(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
14A:11-6. DETERMINATION OF FAIR VALUE BY AGREEMENT
(1) Not later than 10 days after the expiration of the period within which
shareholders may make written demand to be paid the fair value of their shares,
the corporation upon which such demand has been made pursuant to subsections
14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) shall mail to each dissenting
shareholder the balance sheet and the surplus statement of the corporation whose
shares he holds, as of the latest available date which shall not be earlier than
12 months prior to the making of such offer and a profit and loss statement or
statements for not less than a 12-month period ended on the date of such balance
sheet or, if the corporation was not in existence for such 12-month period, for
the portion thereof during which it was in existence. The corporation may
accompany such mailing with a written offer to pay each dissenting shareholder
for his shares at a specified price deemed by such corporation to be the fair
value thereof. Such offer shall be made at the same price per share to all
dissenting shareholders of the same class, or, if divided into series, of the
same series.
(2) If, not later than 30 days after the expiration of the 10-day period
limited by subsection 14A:11-6(1), the fair value of the shares is agreed upon
between any dissenting shareholder and the corporation, payment therefor shall
be made upon surrender of the certificate or certificates representing such
shares.
14A:11-7. PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF ACTION
TO DETERMINE FAIR VALUE
(1) If the fair value of the shares is not agreed upon within the 30-day
period limited by subsection 14A:11-6(2), the dissenting shareholder may serve
upon the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a written demand that it
commence an action in the Superior Court for the determination of the fair value
of the shares. Such demand shall be served not later than 30 days after the
expiration of the 30-day period so limited and such action shall be commenced by
the corporation not later than 30 days after receipt by the corporation of such
demand, but nothing herein shall prevent the corporation from commencing such
action at any earlier time.
(2) If a corporation fails to commence the action as provided in subsection
14A:11-7(1), a dissenting shareholder may do so in the name of the corporation,
not later than 60 days after the expiration of the time limited by subsection
14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT; APPOINTMENT OF
APPRAISER
In any action to determine the fair value of shares pursuant to this
Chapter:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
(b) All dissenting shareholders, wherever residing, except those who have
agreed with the corporation upon the price to be paid for their shares, shall be
made parties thereto as an action against their shares quasi in rem;
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(c) The court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall have
such power and authority as shall be specified in the order of his appointment;
and
(d) The court shall render judgment against the corporation and in favor of
each shareholder who is a party to the action for the amount of the fair value
of his shares.
14A:11-9. JUDGMENT IN ACTION TO DETERMINE FAIR VALUE
(1) A judgment for the payment of the fair value of shares shall be payable
upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate as
the court finds to be equitable, from the date of the dissenting shareholder's
demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) to
the day of payment. If the court finds that the refusal of any dissenting
shareholder to accept any offer of payment, made by the corporation under
section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith, no
interest shall be allowed to him.
14A:11-10. COSTS AND EXPENSES OF ACTION
The costs and expenses of bringing an action pursuant to section 14A:11-8
shall be determined by the court and shall be apportioned and assessed as the
court may find equitable upon the parties or any of them. Such expenses shall
include reasonable compensation for and reasonable expenses of the appraiser, if
any, but shall exclude the fees and expenses of counsel for and experts employed
by any party; but if the court finds that the offer of payment made by the
corporation under section 14A:11-6 was not made in good faith, or if no such
offer was made, the court in its discretion may award to any dissenting
shareholder who is a party to the action reasonable fees and expenses of his
counsel and of any experts employed by the dissenting shareholder.
14A:11-11. DISPOSITION OF SHARES ACQUIRED BY CORPORATION
(1) The shares of a dissenting shareholder in a transaction described in
subsection 14A:11-1(1) shall become reacquired by the corporation which issued
them or by the surviving corporation, as the case may be, upon the payment of
the fair value of shares.
(2) (Deleted by amendment, P.L.1995, c.279.)
(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be cancelled.
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