<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MARCH 15,2000
--------------------
EMAGIN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Nevada 000-24757 88-0378451
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
1580 Route 52, Hopewell Junction, New York 12533
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 892-1900
--------------
Fashion Dynamics Corporation, 1177 West Hastings Street Suite 2000
Vancouver, BC V6E 2K3
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 1. Change in Control of Registrant.
On March 15, 2000, FED Capital Acquisition Corporation, a Delaware
corporation ("Merger-Sub"), a wholly-owned subsidiary of eMagin Corporation, a
Nevada corporation (the "Company"), merged (the "Merger") with and into FED
Corporation, a Delaware corporation ("FED"), pursuant to an Agreement and Plan
of Merger dated March 13, 2000 (the "Merger Agreement"). FED is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. Following the Merger, the business to be conducted by the Company will
be the business conducted by FED prior to the Merger. In conjunction with the
Merger, the Company changed its name from "Fashion Dynamics Corp." to "eMagin
Corporation."
Pursuant to the terms of the Merger Agreement, the Company issued
10,366,000 shares of its authorized but unissued common stock to the former
holders of FED common stock and securities convertible into common stock based
on a conversion ratio of two (2) shares of the Company's common stock for each
share of FED common stock issued and outstanding (or issuable upon conversion or
exercise of existing FED securities) as of the effective time of the Merger. The
shares issued to the former FED stockholders represents approximately 39% of the
outstanding common stock of the Company following the Merger.
All outstanding options to purchase FED common stock were converted
into options to purchase common stock of the Company. FED employee stock options
to purchase an aggregate of 1,634,058 shares of FED Common Stock were converted
into options to purchase 3,268,116 shares of the Company's Common Stock as
follows: (i) 2,376,360 shares of Company Common Stock at an exercise price of
$1.70 per share vesting over 48 months from the date of the Merger; (ii) 42,240
shares of Company Common Stock at an exercise price of $1.70 per share vesting
over 12 months from the date of the Merger, and (iii) 849,516 shares of Company
Common Stock at an average exercise price of $7.59 per share, vesting according
to various schedules.
Immediately prior to the Merger, The Travelers Insurance Company
("Travelers") held approximately 19% of FED's voting equity securities on a
fully diluted basis. In connection with the Offering described in Item 5 below,
Travelers purchased from the Company 1,083,333 shares of Company Common Stock
for an aggregate purchase price of $7,583,333. In addition, prior to the Merger
Travelers purchased 4,357,843 shares of Company Common Stock from existing
stockholders in privately negotiated transactions. Following consummation of the
Merger and after giving effect to the foregoing purchases, Travelers holds
approximately 25% of the outstanding common stock of the Company on a
fully-diluted basis. All shares held by Travelers and its affiliates will bear a
restrictive legend under the Securities Act of 1933. Prior to the Merger, Jack
L. Rivkin, Senior Vice President of The Travelers Investment Group, was as a
member of the board of directors of FED. Pursuant to the terms of the Merger
Agreement, Mr. Rivkin was appointed to serve on the board of directors of the
Company.
<PAGE>
Item 2. Acquisition or Disposition of Assets.
See Item 1 above for a description of the Merger.
Item 5. Other Events.
In connection with the Merger, the Company changed its name to "eMagin
Corporation" and it also issued 3,464,547 shares of its Common Stock pursuant to
Rule 506 under the Securities Act of 1933, as amended, for an aggregate purchase
price of $24,251,830 (the "Offering").
Also in connection with the Merger, Yiu Joe Cheung resigned as the
director of the Company and Gary Jones, N. Damodar Reddy, Ajmal Khan, and Jack
Rivkin were appointed as directors to fill vacancies on the Board of Directors,
to serve in such capacity until the next annual meeting of shareholders of the
Company or until their earlier resignation or removal.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements of FED Corporation
Audited financial statements for years ending 12/31/99 and
12/31/98 Pro Forma Financial Information.
EXHIBIT LIST.
2.1 Agreement and Plan of Merger(1)
4.1 Articles of Incorporation of the Company (previously filed as
an exhibit to Form 10-SB on 5/25/99).
4.2 Amendment to Articles of Incorporation of Company
changing name to "eMagin Corporation."
- --------
(1) The Company undertakes to file supplementally a copy of any schedule to the
Agreement and Plan of Merger to the SEC upon request.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eMAGIN CORPORATION
/s/ Edward Flynn
--------------------------------
Title: Chief Financial Officer
Dated: March 15, 2000
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of FED Corporation:
We have audited the accompanying consolidated balance sheets of FED Corporation
(a Delaware corporation in the development stage - Note 1) and subsidiary as of
December 31, 1999 and 1998, and the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1999, and for the period from inception (January 6, 1992) to
December 31, 1999 and the consolidated statements of shareholders' equity for
the period from inception (January 6, 1992) to December 31, 1992 and for each of
the seven years in the period ended December 31, 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide 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 FED Corporation and subsidiary
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999,
and for the period from inception (January 6, 1992) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
New York, New York
February 14, 2000 (except for Note 3,
as to which the date is March 15, 2000)
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ --------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 718,468 $ 1,878,286
Contract receivables 73,304 262,059
Costs and estimated profits in excess of billings on contracts in progress 221,723 3,290,731
Prepaid expenses and other current assets 127,658 257,498
--------------- ---------------
Total current assets 1,141,153 5,688,574
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,214,680 1,774,816
GOODWILL, net 2,671,390 3,595,356
DEPOSITS AND OTHER ASSETS 10,451 104,449
--------------- ---------------
Total assets $ 5,037,674 $ 11,163,195
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ --------------- ---------------
CURRENT LIABILITIES:
Accounts payable $ 683,237 $ 457,423
Accrued payroll and benefits 1,100,958 952,525
Other accrued expenses 256,905 598,502
Advance payments on contracts to be completed - 246,518
Short-term debt 2,126,700 -
Current portion of long-term debt 268,675 62,234
--------------- ---------------
Total current liabilities 4,436,475 2,317,202
--------------- ---------------
SENIOR NOTES PAYABLE - 4,000,000
--------------- ---------------
LONG-TERM DEBT 541,578 153,276
--------------- ---------------
COMMITMENTS (Note 11)
SHAREHOLDERS' EQUITY:
Cumulative preferred stock, Series A, $.01 par value, 1,466,663 shares
authorized, -0- and 133,333 issued and outstanding, respectively
(liquidation preference of $1.50 per share plus accrued but unpaid
dividends) - 1,333
Noncumulative preferred stock, Series B, $.01 par value, 1,000,000 shares
authorized, -0- and 14,494 issued and outstanding, respectively
(liquidation preference of $4.00 per share plus accrued but unpaid
dividends) - 146
Noncumulative preferred stock, Series C, $.01 par value, 4,812,500 shares
authorized, -0- and 1,156,832 issued and outstanding, respectively
(liquidation preference of $3.50 per share plus accrued but unpaid
dividends) - 11,568
Noncumulative preferred stock, Series D, $.01 par value, 2,388,750 shares
authorized, -0- and 887,304 issued and outstanding, respectively
(liquidation preference of $5.00 per share plus accrued but unpaid
dividends) - 8,873
Noncumulative preferred stock, Series E, $.01 par value, 1,067,500 shares
authorized, -0- and 874,093 issued and outstanding, respectively
(liquidation preference of $6.00 per share plus accrued but unpaid
dividends) - 8,741
Noncumulative preferred stock, Series F, $.01 par value, 4,000,000 shares
authorized, -0- and 1,922,771 issued and outstanding, respectively
(liquidation preference of $6.00 per share plus accrued but unpaid
dividends) - 19,228
Common stock, $.01 par value, 40,000,000 and 20,000,000 shares authorized,
4,380,589 and 5,458,126 shares issued and outstanding, respectively 43,806 54,581
Additional paid-in capital 47,254,459 28,029,950
Deficit accumulated during the development stage (47,238,644) (23,441,703)
--------------- ---------------
Total shareholders' equity (59,621) 4,692,717
--------------- ---------------
Total liabilities and shareholders' equity $ 5,037,674 $ 11,163,195
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
and the Period From Inception (January 6, 1992) to December 31, 1999
<TABLE>
<CAPTION>
Period From
Inception
(January 6, 1992)
Year Ended December 31 to December 31,
------------------------------------------------
1999 1998 1997 1999
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CONTRACT REVENUES $ 1,895,426 $ 6,154,123 $ 3,626,326 $ 14,565,353
---------------- -------------- -------------- --------------
Total revenues 1,895,426 6,154,123 3,626,326 14,565,353
---------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$1,148,166, $1,263,448 and $2,744,865,
respectively 10,171,387 10,250,010 5,433,591 36,323,800
General and administrative 5,203,201 3,513,662 1,980,797 15,069,058
Noncash charge for induced conversion of debt 1,917,391 - - 1,917,391
---------------- -------------- -------------- -----------------
Total costs and expenses, net 17,291,979 13,763,672 7,414,388 53,310,249
---------------- -------------- -------------- -----------------
OTHER INCOME (EXPENSE):
Interest expense (507,900) (207,032) (200,000) (1,106,327)
Interest income 104,208 85,154 258,494 860,725
---------------- -------------- -------------- -----------------
Total other income (expense) (403,692) (121,878) 58,494 (245,602)
---------------- -------------- -------------- -----------------
Loss before provision for income
taxes (15,800,245) (7,731,427) (3,729,568) (38,990,498)
PROVISION FOR INCOME TAXES - - - -
---------------- -------------- -------------- ----------------
Net loss $(15,800,245) $(7,731,427) $(3,729,568) $(38,990,498)
================= =============== =============== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Shareholders' Equity
For the Period From Inception (January 6, 1992) to December 31, 1992 and for
Each of the Seven Years Ended December 31, 1999
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
------------------ ------------------ ------------------- ----------------- ----------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------ ------------------ ------------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, at inception
(January 6, 1992) - $ - - $ - - $ - - $ - - $ -
Sale of common stock to founder - - - - - - - - - -
Sale of common stock to a trust
controlled by founder - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1992 - - - - - - - - - -
Sale of common stock to founder - - - - - - - - - -
Sale of common stock to founder's
family - - - - - - - - - -
Repurchase of common stock from
founder - - - - - - - - - -
Sale of Series A preferred stock 2,000 20 - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1993 2,000 20 - - - - - - - -
Sale of common stock to founder - - - - - - - - - -
Sale of Series B preferred stock - - 10,154 102 - - - - - -
Sales of common stock - - - - - - - - - -
Sales of common stock to employees - - - - - - - - - -
Sales of common stock to employees
and ESPP - - - - - - - - - -
Stock purchases receivable from
employees - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1994 2,000 20 10,154 102 - - - - - -
Sales of common stock, net of
stock issuance costs - - - - - - - - - -
Common stock issued to Director
as finder's fee - - - - - - - - - -
Sales of common stock to employees
and ESPP - - - - - - - - - -
Receipt of stock purchases
receivable from employees - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1995 2,000 20 10,154 102 - - - - - -
Conversion of Series A preferred
stock 131,333 1,313 - - - - - - - -
Common stock issued as finder's
fee - - - - - - - - - -
Sale of common stock to employees
and ESPP - - - - - - - - - -
Exercise of stock options - - - - - - - - - -
Sale of Series B preferred stock - - 1,562 16 - - - - - -
Sale of Series C preferred stock - - - - 1,156,832 11,568 - - - -
Sale of Series D preferred stock - - - - - - 887,304 8,873 - -
Sale of Series E preferred stock - - - - - - - - 874,093 8,741
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1996 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741
<CAPTION>
Series F Series G
--------------------- ---------------------
Preferred Stock Preferred Stock Common Stock
--------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at inception (January 6, 1992) $ - - $ - - $ -
Sale of common stock to founder - - - - 5,000,000 50,000
Sale of common stock to a trust
controlled by founder - - - - 161,000 1,610
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1992 - - - - 5,161,000 51,610
Sale of common stock to founder - - - - 76,000 760
Sale of common stock to founder's family - - - - 13,333 133
Repurchase of common stock from founder - - - - (1,600,000) (16,000)
Sale of Series A preferred stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1993 - - - - 3,650,333 36,503
Sale of common stock to founder - - - - 100 1
Sale of Series B preferred stock - - - - - -
Sales of common stock - - - - 1,047,132 10,471
Sales of common stock to employees - - - - 88,469 885
Sales of common stock to employees and
ESPP - - - - 34,041 340
Stock purchases receivable from employees - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1994 - - - - 4,820,075 48,200
Sales of common stock, net of stock
issuance costs - - - - 460,000 4,600
Common stock issued to Director as
finder's fee - - - - 61,560 616
Sales of common stock to employees and
ESPP - - - - 33,295 333
Receipt of stock purchases receivable
from employees - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 - - - - 5,374,930 53,749
Conversion of Series A preferred stock - - - - - -
Common stock issued as finder's fee - - - - 11,500 115
Sale of common stock to employees and ESPP - - - - 42,447 424
Exercise of stock options - - - - 3,125 31
Sale of Series B preferred stock - - - - - -
Sale of Series C preferred stock - - - - - -
Sale of Series D preferred stock - - - - - -
Sale of Series E preferred stock - - - - - -
Costs of private placement of preferred
stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 - - - - 5,432,002 54,319
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-in Development Subscription
Capital Stage Receivables Total
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, at inception (January 6, 1992) $ - $ - $ - $ -
Sale of common stock to founder (45,000) - - 5,000
Sale of common stock to a trust
controlled by founder 119,140 - - 120,750
Net loss for the period - (59,116) - (59,116)
------------ ------------- ------------- ------------
BALANCE, December 31, 1992 74,140 (59,116) - 66,634
Sale of common stock to founder 61,490 - - 62,250
Sale of common stock to founder's family 19,867 - - 20,000
Repurchase of common stock from founder 14,400 - - (1,600)
Sale of Series A preferred stock 199,980 - - 200,000
Dividends on Series A preferred stock - (3,750) - (3,750)
Net loss for the period - (408,738) - (408,738)
------------ ------------- ------------- ------------
BALANCE, December 31, 1993 369,877 (471,604) - (65,204)
Sale of common stock to founder - - - 1
Sale of Series B preferred stock 40,514 - - 40,616
Sales of common stock 1,591,786 - - 1,602,257
Sales of common stock to employees 133,110 - - 133,995
Sales of common stock to employees and
ESPP 43,062 - - 43,402
Stock purchases receivable from employees - - (26,810) (26,810)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (1,404,862) - (1,404,862)
------------ ------------- ------------- ------------
BALANCE, December 31, 1994 2,178,349 (1,894,466) (26,810) 305,395
Sales of common stock, net of stock
issuance costs 1,107,723 - - 1,112,323
Common stock issued to Director as
finder's fee 153,284 - - 153,900
Sales of common stock to employees and
ESPP 70,420 - - 70,753
Receipt of stock purchases receivable
from employees - - 26,810 26,810
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (3,992,375) - (3,992,375)
------------ ------------- ------------- ------------
BALANCE, December 31, 1995 3,509,776 (5,904,841) - (2,341,194)
Conversion of Series A preferred stock (1,313) - - -
Common stock issued as finder's fee (115) - - -
Sale of common stock to employees and ESPP 105,249 - - 105,673
Exercise of stock options 4,656 - - 4,687
Sale of Series B preferred stock 6,234 - - 6,250
Sale of Series C preferred stock 4,037,344 - - 4,048,912
Sale of Series D preferred stock 4,427,646 - - 4,436,519
Sale of Series E preferred stock 5,235,817 - - 5,244,558
Costs of private placement of preferred
stock (747,292) - - (747,292)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (6,021,867) - (6,021,867)
------------ ------------- ------------- ------------
BALANCE, December 31, 1996 16,578,002 (11,944,708) - 4,718,246
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Shareholders' Equity (Continued)
For the Period From Inception (January 6, 1992) to December 31, 1992
and for Each of the Seven Years Ended December 31, 1999
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
------------------- ------------------ ------------------- ----------------- ----------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------ ------------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 133,333 $ 1,333 11,716 $ 118 1,156,832 $ 11,568 887,304 $ 8,873 874,093 $ 8,741
Sale of common stock to employees
and ESPP - - - - - - - - - -
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1997 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741
Sale of common stock to employees
and ESPP - - - - - - - - - -
Exercise of stock options - - - - - - - - - -
Sale of Series B preferred stock - - 2,778 28 - - - - - -
Sale of Series F preferred stock - - - - - - - - - -
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1998 133,333 1,333 14,494 146 1,156,832 11,568 887,304 8,873 874,093 8,741
Sale of Series G preferred stock
and resulting accretion to
liquidation value - - - - - - - - - -
Dividend on Series A preferred
stock - - - - - - - - - -
Induced conversion of preferred
stock to common stock (133,333) (1,333) (14,494) (146)(1,156,832) (11,568)(887,304) (8,873)(874,093)(8,741)
Sale of common stock to employees
and ESPP - - - - - - - - - -
Common stock options and warrants
issued to nonemployees - - - - - - - - - -
Beneficial conversion feature
upon conversion of Debt - - - - - - - - - -
Stock split (Note 8) - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1999 - $ - - $ - - $ - - $ - - $ -
======== ========= ======== ========= ========== ======== ======== ======== ======== =======
<CAPTION>
Series F Series G
---------------------- --------------------
Preferred Stock Preferred Stock Common Stock
---------------------- -------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 - $ - - $ - 5,432,002 $ 54,319
Sale of common stock to employees and ESPP - - - - 12,728 128
Costs of private placement of preferred
stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1997 - - - - 5,444,730 54,447
Sale of common stock to employees and ESPP - - - - 8,396 84
Exercise of stock options - - - - 5,000 50
Sale of Series B preferred stock - - - - - -
Sale of Series F preferred stock 1,915,471 19,155 - - - -
Costs of private placement of preferred - -
stock 7,300 73 - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1998 1,922,771 19,228 - - 5,458,126 54,581
Sale of Series G preferred stock and
resulting accretion to liquidation
value - - 681,446 6,814 - -
Dividend on Series A preferred stock - - - - - -
Induced conversion of preferred stock to
common stock (1,922,771) (19,228)(681,446) (6,814) 25,197,315 251,973
Sale of common stock to employees and ESPP - - - - 8,326 83
Common stock options and warrants issued
to nonemployees - - - - - -
Beneficial conversion feature
upon conversion of Debt - - - - - -
Stock split (Note 8) - - - - (26,283,178) (262,831)
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1999 - $ - - $ - 4,380,589 $ 43,806
========== ======== ========= ========== ========== ===========
<CAPTION>
Accumulated
Additional During the
Paid-in Development Subscription
Capital Stage Receivables Total
------------ ------------- ------------- ------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ 16,578,002 $ (11,944,708) $ - $ 4,718,246
Sale of common stock to employees and ESPP 53,246 - - 53,374
Costs of private placement of preferred
stock (7,830) - - (7,830)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (3,729,568) - (3,729,568)
------------ ------------- ------------- ------------
BALANCE, December 31, 1997 16,623,418 (15,692,276) - 1,016,222
Sale of common stock to employees and ESPP 38,311 - - 38,395
Exercise of stock options 12,450 - - 12,500
Sale of Series B preferred stock 16,638 - - 16,666
Sale of Series F preferred stock 11,473,671 - - 11,492,826
Costs of private placement of preferred
stock (134,538) - - (134,465)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (7,731,427) - (7,731,427)
------------ ------------- ------------- ------------
BALANCE, December 31, 1998 28,029,950 (23,441,703) - 4,692,717
Sale of Series G preferred stock and
resulting accretion to liquidation
value 4,702,817 (957,185) - 3,752,446
Dividend on Series A preferred stock - (9,000) - (9,000)
Induced conversion of preferred stock to
common stock 12,676,004 (7,030,511) - 5,840,763
Sale of common stock to employees and ESPP 15,524 - - 15,607
Common stock options and warrants issued
to nonemployees 234,000 - - 234,000
Beneficial conversion feature
upon conversion of Debt 1,333,333 - - 1,333,333
Stock split (Note 8) 262,831 - - -
Net loss for the period - (15,800,245) - (15,800,245)
------------ ------------- ------------- ------------
BALANCE, December 31, 1999 $ 47,254,459 $ (47,238,644) $ - $ (59,621)
============ ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 and for the Period From
Inception (January 6, 1992) to December 31, 1999
<TABLE>
<CAPTION>
Period from Inception
Year Ended December 31 (January 6, 1992)
-------------------------------------------------
1999 1998 1997 to December 31, 1999
--------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,800,245) $ (7,731,427) $ (3,729,568) $ (38,990,498)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 1,625,081 1,652,715 456,525 4,804,920
Deferred rent - (167,446) (28,894) -
Gain on sale of assets - - - (69,525)
Noncash charge for induced conversion
of debt 1,917,391 - - 1,917,391
Noncash charges for value of warrants
granted and amortization of original
issue discount 203,000 - - 203,000
Changes in operating assets and
liabilities-
Contract receivables 188,755 1,723,189 (1,619,680) (73,304)
Costs and estimated profits in excess
of billings on contracts in progress 3,069,008 (3,220,079) (70,652) (221,723)
Prepaid expenses and other current assets 129,840 214,738 (15,153) 140,779
Deposits and other assets 23,871 628,756 (628,756) 23,871
Accounts payable 205,981 (81,838) 374,361 728,914
Accrued payroll and benefits 172,778 75,094 141,790 1,011,426
Other accrued expenses (247,847) 340,008 87,568 370,257
Advance payments on contracts to be
completed (246,518) 246,518 - -
--------------- -------------- -------------- ---------------------
Net cash used in operating
activities (8,601,205) (6,319,772) (5,032,459) (30,154,492)
--------------- -------------- -------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (250,193) (688,042) (879,049) (3,154,640)
Acquisition of business, net of cash acquired - (547,503) - (547,503)
Proceeds from the sale of assets - - - 229,550
--------------- -------------- -------------- ---------------------
Net cash used in investing
activities (250,193) (1,235,545) (879,049) (3,472,593)
--------------- -------------- -------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes, net of issuance
costs - - - 3,968,958
Proceeds from short-term debt 3,333,333 - - 3,333,333
Proceeds from notes payable 590,232 - - 590,232
Proceeds from sales of common stock, net of
issuance costs 15,608 40,208 53,246 3,419,160
Proceeds from sales of preferred stock, net
of issuance costs 3,752,407 6,875,028 - 23,856,998
Payments of obligations under capital lease - - (327,162) (823,128)
--------------- -------------- -------------- ---------------------
Net cash provided by (used in)
financing activities 7,691,580 6,915,236 (273,916) 34,345,553
--------------- -------------- -------------- ---------------------
Net (decrease) increase in cash
and cash equivalents (1,159,818) (640,081) (6,185,424) 718,468
CASH AND CASH EQUIVALENTS, beginning of period 1,878,286 2,518,367 8,703,791 -
--------------- -------------- -------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 718,468 $ 1,878,286 $ 2,518,367 $ 718,468
=============== ============== ============== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
(Continued) For the Years Ended December 31, 1999, 1998 and 1997 and for
the Period From Inception (January 6, 1992) to December 31, 1999
<TABLE>
<CAPTION>
Period from Inception
Year Ended December 31 (January 6, 1992)
------------------------------------------------
1999 1998 1997 to December 31, 1999
-------------- -------------- ------------- ---------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 242,000 $ 200,000 $ 214,005 $ 930,593
============== ============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to common stock $ 7,576,862 $ - $ -
============== ============== =============
Conversion of senior debt to common stock $ 4,000,000 $ - - $ -
============== ============== =============
ACQUISITION OF BUSINESS:
Fair value of assets acquired, net of cash acquired $ - $ 978,399 $ -
Liabilities assumed - (165,163) -
Excess purchase price over net assets acquired - 4,234,267 -
Value of preferred stock issued - (4,500,000) -
-------------- ---------- -------------
Net cash paid for acquisition $ - $ 547,503 $ -
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. NATURE OF BUSINESS AND
DEVELOPMENT STAGE RISKS
FED Corporation ("FED", together with its subsidiary the "Company") was formed
on January 6, 1992, to develop, manufacture and market field emitter devices or
flat panel displays. In January 1994, the Company moved its principal office
from North Carolina to New York State. In connection with this move, a Delaware
corporation was established and the North Carolina Corporation was statutorily
merged into the Delaware corporation with the latter being the survivor. During
1998, FED acquired Virtual Vision, Inc. ("Virtual Vision," or the "Subsidiary"),
a head-mounted display technology company. Virtual Vision develops and markets
head-mounted display systems for standalone and wireless computing in
commercial, industrial, and military applications.
The Company continues to be a development stage company, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises", as it continues to devote substantially all of
its efforts to establishing a new business, and it has not yet commenced its
planned principal operations. Revenues earned by the Company to date are
primarily related to research and development type contracts and are not related
to the Company's planned principal operations of the commercialization of
products using OLED technology.
Since inception, the Company has entered into research and development
cost-sharing arrangements, as well as research and development contracts, with
several government agencies and private industry. To date, such arrangements
have provided total funding of approximately $24.6 million through cost sharing
arrangements and contract revenues. Certain of these arrangements continue
through 2001 and provide for approximately $9.4 million of additional funding.
Such funding is subject to, among other factors, satisfactory progress on
projects and available government funding.
Through December 31, 1999, the Company had incurred development stage losses
totaling approximately $39 million, and at December 31, 1999, had a total
shareholders' deficit of $1.1 million and a working capital deficit of $4.5
million. The Company's future success is dependent upon its ability to continue
to raise capital for, among other things, (1) its research and development
efforts, (2) hiring and retaining key employees, (3) satisfaction of its
commitments and (4) the successful development and marketing of its products.
The Company believes that its remaining cash resources at year-end, together
with the proceeds resulting from the merger (Note 3), will be sufficient to fund
the Company's operations through 2000 and beyond. However, there can be no
assurance that the Company's efforts to produce a commercially viable product
will be successful, that the Company will generate sufficient revenues to
provide positive cash flows from operations or that additional capital will be
available, if required, to permit the Company to realize its plans.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
As of December 31, 1998, the Company had received advance payments on contracts
to be completed of $246,518. At December 31, 1999, such amounts were minimal.
COSTS AND ESTIMATED PROFITS IN EXCESS OF
BILLINGS ON CONTRACTS IN PROGRESS
The Company records costs and estimated profits in excess of billings on
contracts in progress as an asset on its balance sheet to the extent such costs,
and related profits, if any, have been incurred under outstanding contracts and
are expected to be collected.
The components of costs and estimated profits in excess of billings on contracts
in progress as of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Total costs incurred and estimated profits $ 1,216,000 $ 8,415,000
Less amounts billed 994,000 5,115,000
--------------- ---------------
Costs and estimated profits in excess of
billings on contracts in progress $ 222,000 $ 3,300,000
=============== ===============
</TABLE>
RESEARCH AND DEVELOPMENT/
COST SHARING ARRANGEMENTS
To date, activities of the Company include the performance of research and
development under cooperative agreements with United States Government agencies.
Current industry practices provide that costs and related funding under such
agreements be accounted for as incurred and earned.
The Company has entered into three cost sharing arrangements with an agency of
the U.S. Government. The Company has incurred research and development costs and
earned funding under these agreements as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Unfunded research and development $ 8,997,000 $ 8,726,000 $ 2,869,000
Research and development costs 2,322,000 2,787,000 5,310,000
Funding received (1,148,000) (1,263,000) (2,745,000)
-------------- --------------- ---------------
$ 10,171,000 $ 10,250,000 $ 5,434,000
============== =============== ===============
</TABLE>
Although it is not under any obligation to do so, the Company may incur
approximately $6,700,000 of additional costs relating to these efforts. If such
costs, as defined in the related agreements, are incurred, the government is
obligated to reimburse the Company for $3,326,000 of such costs.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist primarily
of overnight commercial paper and are stated at cost, which approximates market,
and are considered available for sale.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires the classification of debt and equity securities based on
whether the securities will be held to maturity, are considered trading
securities or are available-for-sale. Classification within these categories may
require the securities to be reported at their fair market value with unrealized
gains and losses included either in current earnings or reported as a separate
component of shareholders' equity, depending on the ultimate classification.
COMPREHENSIVE INCOME
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains or losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial
statements. The Company's operations did not give rise to any material items
includable in comprehensive income which were not already in net income for the
years ended December 31, 1999, 1998 and 1997. Accordingly, the Company's
comprehensive income is the same as its net income for all period presented.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over
their estimated useful lives. Amortization of leasehold improvements is
calculated by using the straight-line method over the shorter of their estimated
useful lives or lease terms. Expenditures for maintenance and repairs are
charged to expense as incurred.
GOODWILL
Excess purchase price over net assets acquired ("goodwill") is amortized on a
straight-line basis over the estimated period of benefit of the business
acquired. Goodwill related to the acquisition of Virtual Vision of approximately
$4,110,000, net of accumulated amortization of $1,439,000 at December 31, 1999,
is being amortized over a period of five years.
LONG-LIVED ASSETS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed," establishes financial accounting and
reporting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. SFAS No. 121 requires, among other
things, that assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
realizable considering, among other factors, expected future undiscounted
operating cash flows of the related asset.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
INCOME TAXES
Deferred income taxes are recorded by applying enacted statutory tax rates to
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. At December 31, 1999, the Company
has net deferred tax assets of approximately $14.3 million, primarily resulting
from the future tax benefit of net operating loss carryforwards discussed below.
Such net deferred tax assets are fully offset by valuation allowances because of
the uncertainty as to their future realizability.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $35.8 million, which expire through 2019, available to offset
future taxable income. Pursuant to Section 382 of the Internal Revenue Code, the
usage of a portion of these net operating loss carryforwards is limited due to
changes in ownership that have occurred. Additionally, the transaction discussed
in Note 3, if consummated, will result in a further limitation of the use of
such net operating loss carryforwards.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25"), "Accounting for Stock Issued to Employees." The Company, as permitted,
elected not to adopt the financial reporting requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," for stock-based compensation granted
to employees. Accordingly, the Company has disclosed in the notes to the
financial statements the pro forma net loss for the periods presented as if the
fair-value-based method was used in accordance with the provisions of SFAS No.
123.
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 disclosures 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.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the current
year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Boards issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability and
be measured at its fair value. Additionally, any changes in the derivative's
fair value are to be recognized currently in earnings, unless specific hedge
accounting criteria are met. This statement is effective for fiscal years
beginning after June 15, 2000. The Company does not believe that adoption of
this statement will have a material impact on its consolidated financial
statements.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
3. MERGER
On March 15, 2000, the Company effected a merger (the "Merger") with and into a
publicly traded shell company (the "Issuer"). In connection with the Merger,
approximately $24,000,000 of gross proceeds were raised by the Issuer in a
private placement of equity securities. Upon consummation of the Merger,
approximately 5.2 million shares of the Company's common stock, considered on a
fully diluted basis, were converted to 10,366,000 shares of the combined entity.
Prior to the consummation of the Merger, the Company reduced its number of
non-accredited investors to less than 35, such that this transaction shall be
exempt from filing with the Securities and Exchange Commission. In connection
with this effort, during February 2000 the Company purchased approximately
19,700 shares of common stock at an aggregate purchase price of $4.50 per share.
4. ACQUISITION OF VIRTUAL VISION
In March 1998, the Company acquired all of the outstanding stock of Virtual
Vision for a total purchase price of $5,000,000, consisting of $500,000 in cash
and 750,000 shares of the Company's Series F Preferred Stock valued at $6.00 per
share. The acquisition was accounted for under the purchase method of accounting
and the results of operations of Virtual Vision have been included in the
consolidated financial statements since the date of acquisition. The purchase
price was allocated based on the fair value of the assets acquired, determined
by management's estimates, as supported by appraisal. Purchase price in excess
of net assets acquired of approximately $4.1 million resulted in the
acquisition, which is being amortized over a period of five years. Pro forma
results of operations for the periods prior to the acquisition are not
materially different than the accompanying historical statements of operations
presented for the Company.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Useful
Lives 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Computer equipment and software 3 $ 558,552 $ 530,088
Lab and factory equipment 3 3,142,186 3,022,441
Furniture, fixtures and office equipment 10 148,835 230,916
Leasehold improvements Life of lease 669,245 485,182
-------------- --------------
4,518,818 4,268,627
Less- Accumulated depreciation and amortization (3,304,138) (2,493,811)
-------------- --------------
$ 1,214,680 $ 1,774,816
============== ==============
</TABLE>
Depreciation and amortization expense of equipment and leasehold improvements
for the years ended December 31, 1999, 1998 and 1997, amounted to approximately
$810,000, $1,026,000 and $435,000, respectively.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Additionally, from time to time, the Company makes deposits on certain equipment
that may ultimately be purchased by a financing company and leased to the
Company. Amounts paid by the Company for such deposits totaled approximately
$14,000 and $1,840,000 for the years ended December 31, 1999 and 1998,
respectively. During 1998, certain equipment, on which the Company had made
deposits, was purchased by a financing company and the Company was reimbursed
for such deposits totaling approximately $2,469,000. These activities were not
material during 1999.
6. DEBT
SENIOR NOTES PAYABLE
In April 1995, the Company completed a private placement for the issuance and
sale of its 5% senior notes in the aggregate principal amount of $4,000,000,
which was to mature in full on April 12, 2002, at an interest rate of 5% per
annum payable quarterly. In July 1999, as part of the Company's recapitalization
(Note 8), the note was converted into 5,072,464 shares of the Company's common
stock. Under the original terms of the notes, the holders of the senior notes
had the right to convert the unpaid principal balance, in multiples of $1,000,
into common stock at the price of $3.45 per share at any time, subject to
provision for anti-dilution. In order to induce the noteholders to convert such
notes, the Company provided for a conversion rate of 4.375 shares of common
stock, for each share of common stock otherwise provided for under the original
conversion terms. The Company has recorded an expense of $1,917,000 in the
accompanying statement of operations for the year ended December 31, 1999 as a
result of the conversion, based on an estimated fair value of $3.40 per share,
the value of a common share based on the Merger discussed in Note 3.
BRIDGE LOANS
In September 1999, the Company entered into two $1,000,000 convertible bridge
loans for an aggregate of $2,000,000. Each loan bears interest at 8% and matures
in June 2000. The loans are convertible at the option of the holder into shares
of the Company's common stock at a purchase price equal to the per share value
of the private placement to be completed in connection with the Merger discussed
in Note 3. Prior to the maturity date, upon the closing of an equity financing,
as defined, the entire outstanding balance of the bridge loans, including
accrued and unpaid interest will be automatically converted into common stock.
In connection with these loans, the Company issued warrants for the purchase of
167,000 shares of the Company's common stock at an excise price of $12.00 per
share. The intrinsic value of these warrants of $140,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of this
debt. The original issue discount will be amortized into interest expense over
the period of the debt.
In December 1999, the Company borrowed $1,333,333 from a corporation under the
terms of a convertible note. The note is convertible into 388,726 shares of
common stock. The loan bears interest at 8% annually and matures in May 2000.
In connection with the Merger discussed in Note 3, all of the bridge loans
described above will convert into common stock.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
7. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Notes payable (a) $ 653,385 $ -
Liabilities assumed from Virtual Vision (b) 100,000 150,000
Capital leases (c) 56,868 65,510
-------------- --------------
810,253 215,510
Less- Current portion 268,675 62,234
-------------- --------------
$ 541,578 $ 153,276
============== ==============
</TABLE>
a. In May 1999, the Company entered into a $625,000 three-year loan
agreement collateralized by its fixed assets. The aggregate remaining
principal balance is $508,421 at December 31, 1999 and payments are due
through 2002 at an interest rate of 13.88%.
In June 1999, the Company entered into a $155,000 five-year
uncollateralized loan agreement. The proceeds were used to finance a
leasehold improvement. The aggregate principal balance is $144,964 at
December 31, 1999 and payments are due through 2004 at an interest rate
of 18%.
b. In connection with the acquisition, the Company assumed a liability
relating to a previous acquisition made by Virtual Vision. At December
31, 1999, the remaining payments under this agreement totaled $100,000,
payable $50,000 per year for each of the next two years. This agreement
also provides for additional payments over the $50,000 per year should
certain technology acquired be used in consumer applications, whereby
payments would be required based on certain percentages of licensing
and sales revenues.
c. The Company is party to a capital lease for certain equipment with
aggregate remaining principal balance totaling $56,867 at December 31,
1999, excluding interest, due through 2003 at an interest rate of 7.27%
Maturity of debt as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $268,675
2001 350,916
2002 115,241
2003 49,450
2004 25,971
----------
$810,253
</TABLE>
8. SHAREHOLDERS' EQUITY
COMMON STOCK
In July 1999, the Company effected a 1 for 7 reverse stock split, resulting in a
reduction of total common shares outstanding from approximately 30.7 million
shares to approximately 4.4 million shares.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During 1999, the Company amended its Certificate of Incorporation and was
authorized to issue 50,000,000 shares of its Common Stock.
PREFERRED STOCK
Through 1999, the Company's Certificate of Incorporation provided for the
issuance of a total of 5,000,000 shares of preferred stock, which could be
issued in various series.
Through 1998, the Company had issued an aggregate of 4,988,827 of Series A
through F preferred stock. The various series generally provided for a
liquidation preference equal to the original purchase price of the preferred
stock, plus accrued but unpaid dividends, if declared, and were generally
convertible at a rate of one share of preferred for one share of common, at the
option of the holder.
During 1999, the Company issued 681,446 shares of Series G preferred stock,
generating aggregate proceeds of approximately $3,847,000. In connection with
the issuance of the Series G preferred, the Company offered exchange credits
whereby those purchasers of Series G preferred, also holders of preferred Series
D, E and F, would exchange Series D, E and F preferred for upgrades to Series
D1, E1 and F1 preferred.
The Series G preferred provided for an immediate liquidation value of $7.05 per
share, in excess of the purchase price. Accordingly, a charge of approximately
$957,000 was recorded against retained earnings to accrete the value of the
preferred stock to its liquidation value.
In July 1999, the Company induced conversion of all preferred series by
providing for conversion rates and terms that were more beneficial than the
original terms. The conversion of all preferred series resulted in the issuance
of 20,124,851 shares of the Company's common stock, 14,474,579 shares in excess
of the number of shares that would have been issued under the original terms of
the preferred series. Accordingly, a charge to retained earnings of
approximately $7,000,000 has been recorded, based on a fair value of
approximately $3.40 per common share, the fair value attributable to the
Company's common stock in the Merger discussed in Note 3.
9. STOCK-BASED COMPENSATION PLANS
The Company has two stock-based compensation plans, described below, which
provide for the grant at fair market value. The Company applies APB Opinion No.
25 and related interpretations of accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123, the
Company's net loss would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss as reported $ (15,642,545) $ (7,731,427) $ (3,729,568)
Net loss pro forma (16,498,359) (7,949,206) (3,918,208)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are not anticipated.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
STOCK OPTION PLAN
As amended in the Certificate of Incorporation, the Company's Stock Plan (the
"Plan") permits the granting of options to purchase an aggregate of 4,500,000
shares of the Company's Common Stock to employees and consultants of the
Company. The Plan also permits the granting of stock purchase rights to
employees and consultants of the Company. Under the Plan, the Company may grant
either incentive or nonstatutory stock options; however, incentive options may
only be granted to employees. The exercise price of an incentive stock option
may not be less than the fair market value, as estimated by management, of the
Company's common shares on the date such option is granted. The exercise price
of a nonstatutory stock option may be less than the fair market value on the
date of grant. In accordance with SFAS No. 123, any grants to other than
employees of the Company, and certain directors, will result in a charge on
earnings based to the fair value of the instruments granted.
Vesting terms of the options range from immediate vesting of all options to a
ratable vesting period of 5-1/2 years. Option activity for the years ended
December 31, 1999, 1998 and 1997 is summarized as follows (all amounts have been
restated to reflect the Company's 1 for 7 reverse stock split (Note 8)):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise Price
Shares Price Shares Price Shares
------------ ----------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 288,875 $ 18.13 269,642 $ 16.73 284,170 $ 16.80
Options granted 155,666 21.00 24,728 34.44 14,214 28.42
Options exercised - - (714) 17.50 - -
Options forfeited (22,718) 22.43 (1,163) 18.48 (18,071) 22.75
Options canceled (46,521) 21.68 (3,618) 27.23 (10,671) 23.94
----------- ------------ ------------
Outstanding at end of year 375,302 18.59 288,875 18.13 269,642 16.73
=========== ============ ============
Exercisable at end of year 283,389 134,198 16.38 114,095 15.68
=========== ============ ============
Weighted average fair value of
options granted $ 14.84 $ 8.68 $ 8.05
</TABLE>
At December 31, 1999, there were 267,555 shares available for grant under the
Plan.
At December 31, 1999, there were 369,136 warrants issued and included in the
Black-Scholes option pricing model for pro forma purposes.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: risk-free interest
rate of 4.49% and 5.29%; no expected dividend yield, expected lives of 2.6 and
5.3 years; and 78% and 0 expected stock price volatility in 1999 and 1998,
respectively. Exercise prices for outstanding options at December 31, 1999 and
1998 range from $5.20 - $38.00.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted Weighted Number Weighted
Number Average Average Exercisable at Average
Range of Exercise Outstanding at Remaining Exercise December 31, Exercisable
Prices December 31, 1999 Contractual Life Price 1999 Price
----------------- ----------------- ---------------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $15.00 120,315 5 years $ 11.23 119,486 $ 11.23
15.01 - 20.00 76,014 5.9 years 17.99 52,379 18.22
20.01- 25.00 156,334 4.9 years 21.80 106,382 21.67
25.01- 40.00 22,652 8.2 years 37.53 5,143 37.28
-------------- --------------
375,315 283,390
============== ==============
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
During 1994, the Company adopted a noncompensatory Employee Stock Purchase Plan
(the "ESPP"), under which eligible employees may contribute up to 20% of their
base earnings, through payroll deductions, toward the purchase of the Company's
Common Stock. The employees' purchase price is derived from a formula based on
the fair market value of the Common Stock. A total of 200,000 shares of Common
Stock are reserved for issuance under the ESPP, of which 8,326 and 8,396 were
purchased by employees during 1999 and 1998, respectively. No compensation
expense has been recorded in connection with these transactions to date as the
aggregate differences between the purchase price and the fair value of the
common stock purchased have been immaterial.
WARRANTS
In June 1999, the Company issued a warrant to purchase 600,000 shares of the
Company's common stock to an entity for a commitment to participate in future
financings. The warrant is exercisable for a three year period at an exercise
price of $12 per share. The exercise price is subject to change for antidilution
effects, as defined. The intrinsic value of this warrant of approximately
$71,000 was charged to the statement of operations for the year ended December
31, 1999.
10. BUSINESS ALLIANCE AGREEMENT
On July 1, 1993, the Company entered into a Business Alliance Agreement (the
"Agreement") with Harris Corporation, Electronics Systems Sector ("Harris").
Harris develops, manufactures and sells systems which could include FED displays
for use in military aerospace programs. The Agreement provides that Harris and
the Company will work together and cooperate to the extent that each contributes
its particular expertise and knowledge to the development and marketing of
displays for certain military and/or aerospace system applications. The Company
retains full ownership of all intellectual property rights for display
technology that it develops. In addition, the Agreement provides that a
representative of Harris be allowed to attend and participate in the Board of
Directors' meetings of the Company. However, the Harris representative does not
have voting rights. This Agreement extends for seven years and renews
automatically in two-year increments thereafter unless either party notifies
otherwise.
<PAGE>
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
11. COMMITMENTS
ROYALTY PAYMENTS
In 1992, the Company entered into a license agreement with the Microelectronics
Center of North Carolina ("MCNC"), granting the Company exclusive rights to all
inventions and patents developed by MCNC involving field emission technology.
The Company is obligated to pay a royalty in connection with the sale of
products related to certain technologies of .1% to 2%, as defined, with minimum
royalty payments of $50,000 per year through 1997 and $75,000 per year
thereafter for as long as any one of the patents remains valid and outstanding.
There were no sales of products in 1998 or 1997. In 1999, the Company terminated
this license agreement. The Company has recorded $75,000 and $50,000 of royalty
expense in research and development expenses for the years ended December 31,
1998 and 1997, respectively.
The Company, as a result of its acquisition of Virtual Vision (Note 4) was
obligated to pay royalties to Insight Corporation ("Insight") on their license
and sales revenues allocable to the patent application and patent acquired from
Insight. If royalties payable in any year are less than $75,000, the Company may
pay Insight the deficiency and receive a credit against royalties payable in
future years. In 1999, the Company elected not to pay the deficiency and Insight
exercised its right to repurchase the patent application and patent for $75,000.
For the year ended December 31, 1998 the Company had recorded $56,250 of royalty
expense in research and development expenses. There was no royalty expense
incurred during 1999.
LICENSE AND TECHNOLOGY AGREEMENT
In March 1997, the Company entered into a technology agreement with a
corporation to permit potential commercialization of small-format OLED displays.
The Company is dependent upon its license agreement with the corporation for the
development and commercialization of its currently planned OLED products.
Payments are due under evaluation and license agreements based on the
achievement of certain milestones in phases of the agreements. Payments totaling
$650,000 and $250,000 for the years ended December 31, 1999 and 1998,
respectively, were charged to research and development expense under various
phases of these agreements. Based on the remaining phases of the current
agreements, the Company will be required to make additional payments of $250,000
in 2001, if the remaining phases of the agreements are achieved.
OPERATING LEASES
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through January 2004. Certain leases
provide for payments of monthly operating expenses. The approximate future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $ 2,879,168
2001 2,305,830
2002 1,045,993
2003 914,920
2004 383,534
---------------
$ 7,529,445
===============
</TABLE>
For the years ended December 31, 1999 and 1998, rent expense was approximately
$2,813,000 and $1,841,000, respectively.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
DRAFT - FOR DISCUSSION PURPOSES ONLY
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Effective March 15, 2000, Fashion Dynamics Corporation ("Fashion Dynamics"),
through a wholly-owned subsidiary, and eMagin Corporation ("eMagin", formerly
FED Corporation ("FED")) consummated an agreement and plan of merger (the
"Merger"). In connection with the Merger, in March 2000, Fashion Dynamics sold
3,511,905 additional shares of common stock to investors in a private placement
transaction, generating net proceeds of approximately $24.5 million. The
accompanying unaudited pro forma balance sheet as of December 31, 1999, presents
the financial position of Fashion Dynamics and eMagin, assuming the Merger had
been at that date. The unaudited pro forma statement of operations for the year
ended December 31, 1999, reflects the Merger as if it had been consummated on
January 1, 1999.
Fashion Dynamics acquired 100% of the outstanding shares of eMagin through the
issuance of 8,721,680 shares of Fashion Dynamics common stock, based on an
exchange ratio of 2 shares of Fashion Dynamics common stock for each share of
eMagin common stock. As a result of the Merger, the eMagin stockholders
collectively acquired approximately 35% of the Fashion Dynamics common stock
outstanding after the Merger. Additionally, Fashion Dynamics will convert
approximately 1,600,000 stock options that were outstanding to eMagin employees,
into 3,200,000 Fashion Dynamics stock options, at exercise prices ranging from
$1.70 to $6.11. The accompanying unaudited pro forma financial information does
not include equity transactions subsequent to December 31, 1999 not directly
associated with the Merger, except for the issuance of common stock in
connection with the private placement in March 2000 referred to above. This
transaction will be accounted for as a purchase by Fashion Dynamics.
The pro forma financial information does not purport to be indicative of the
results which would have actually have been obtained had such transactions been
completed as of the assumed dates and for the periods presented or which may be
obtained in the future. The pro forma balance sheet and the pro forma
adjustments described in the notes to pro forma financial statements reflect the
excess of purchase price over the net book value of assets acquired as "Purchase
Price to be Allocated". The Company is currently in the process of evaluating
the fair values of assets acquired, including identifiable intangible assets, if
any. Additionally, considering that eMagin is a development stage entity, and
has been since its inception in 1992, management expects that a portion of the
purchase price will be attributable to purchased in-process research and
development, and that amount may be significant. In accordance with Statement of
Financial Accounting Standards No. 2, "Accounting for Research and Development
Costs", as clarified by Financial Accounting Standards Board Interpretation No.
4, amounts assigned to in-process research and development will be charged to
expense as part of the allocation of purchase price.
<PAGE>
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA BALANCE SHEET - ASSETS
AS OF DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
----------- ------------- --------------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 718,468 $ 24,483,335 (b) $ 24,601,803
(600,000) (e)
Contract receivables, net - 73,304 73,304
Unbilled costs and estimated profits on
contracts in progress - 221,723 221,723
Prepaid expenses and other current assets - 127,658 127,658
----------- ------------- ----------------
Total current assets - 1,141,153 25,024,488
PROPERTY AND EQUIPMENT, NET - 1,214,680 1,214,680
PURCHASE PRICE OT BE ALLOCATED - 2,671,390 31,000 (c) 76,770,000
(2,671,390) (d)
73,850,000 (d)
2,889,000 (e)
OTHER ASSETS - 10,451 10,451
----------- ------------- --------------
$ - $ 5,037,674 $ 103,019,619
=========== ============= ==============
</TABLE>
<PAGE>
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA BALANCE SHEET - LIABILITIES AND SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
------------ ----------------- ---------------- --------------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ - $ 634,967 $ 634,967
Accrued payroll and benefits - 1,100,958 1,100,958
Oither accrued expenses - 256,905 256,905
Short-term debt - 3,302,333 31,000 (c) -
(3,333,333) (c)
Current portion of long-term debt - 268,675 268,675
Other current liabilities - 48,270 48,270
------------ ----------------- --------------------
Total current liabilities - 5,612,108 2,309,775
------------ ----------------- --------------------
LONG-TERM DEBT - 541,578 541,578
------------ ----------------- --------------------
SHAREHOLDERS' EQUITY:
Preferred stock - - -
Common stock 20,156 43,806 (7,639) (a) 25,079
3,512 (b)
476 (c)
(35,559) (d)
327 (e)
Additional paid-in capital 10,844 45,921,126 7,639 (a) 100,174,187
24,479,823 (b)
3,332,857 (c)
24,133,225 (d)
2,288,673 (e)
Deficit accumulated during the development stage (31,000) (47,080,944) 47,080,944 (d) (31,000)
------------ ----------------- --------------------
Total shareholders' equity - (1,116,012) 100,168,266
------------ ----------------- --------------------
$ - $ 5,037,674 $ 103,019,619
============ ================= ====================
</TABLE>
<PAGE>
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
------------ ----------------- ---------------- --------------------
<S> <C> <C> <C> <C>
CONTRACT REVENUES $ - $ 1,895,426 $ 1,895,426
---------- --------------- --------------
COSTS AND EXPENSES:
Research and development,
net of funding under cost sharing arrangement - 10,171,387 10,171,387
General and administrative expenses 18,452 5,203,201 15,354,000 (f) 20,575,653
Non-cash charge for induced conversion of debt - 1,917,391 1,917,391
---------- --------------- --------------
18,452 17,291,979 32,664,431
---------- --------------- --------------
Loss from operations (18,452) (15,396,553) (30,769,005)
INTEREST EXPENSE - (350,200) 54,068 (g) (296,132)
INTEREST INCOME - 104,208 104,208
---------- --------------- --------------
(Loss) before provision for income taxes (18,452) (15,642,545) (30,960,929)
PROVISION FOR INCOME TAXES - - -
---------- --------------- --------------
Net (loss) $ (18,452) $ (15,642,545) $ (30,960,929)
========== =============== ===============
NET (LOSS) PER SHARE - BASIC AND DILUTED $ (1.23)
===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 25,078,651 (h)
==================
</TABLE>
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
In the Merger, Fashion Dynamics acquired all of the outstanding shares of eMagin
through the issuance of 8,721,680 shares of Fashion Dynamics common stock, as
well as the exchange of outstanding eMagin stock options for Fashion Dynamics
stock options. The Merger will be accounted for as an acquisition, with Fashion
Dynamics as the acquiror. The shares issued by Fashion Dynamics in the Merger
are valued at $7.00 per share, the value of the common shares sold in the
private placement transaction consummated in connection with the Merger.
The unaudited pro forma balance sheet combines the balance sheets of Fashion
Dynamics and eMagin as of December 31, 1999, assuming that the Merger had been
completed at that date. The unaudited pro forma statement of operations combines
the statements of operations of Fashion Dynamics and eMagin for the year ended
December 31, 1999, assuming the Merger occurred on January 1, 1999.
The historical balance sheets and statements of operations as of and for the
year ended December 31, 1999, used in the preparation of the pro forma financial
statements have been derived from the respective audited financial statements of
Fashion Dynamics and eMagin.
UNAUDITED PRO FORMA ADJUSTMENTS
Descriptions of the adjustments included in the unaudited pro forma financial
statements are as follows:
BALANCE SHEET ADJUSTMENTS
(a) Reflects the cancellation of 7,638,670 Fashion Dynamics shares by Fashion
Dynamics' majority shareholder effected prior to the Merger.
(b) Reflects Fashion Dynamics' receipt of $24,483,000 of proceeds, net of
approximately $100,000 of related expenses, from a private placement of
3,511,905 shares of common stock in March 2000.
(c) Reflects the conversion of bridge loans into approximately 476,200 shares
of common stock at a conversion price of $7.00 per share, and the
amortization of the remaining original issue discount as additional
purchase price.
(d) Reflects the accounting for the Merger as the purchase of eMagin's common
stock for a total purchase price of approximately $73,850,000, consisting
of the issuance of 8,721,680 shares of Fashion Dynamics' common stock,
valued at approximately $61,050,000, or $7.00 per share, the per share
value of the common shares sold in the private placement consummated in
connection with the Merger and approximately $12,800,000 relating to the
<PAGE>
value of Fashion Dynamics' stock options exchanged for outstanding eMagin
stock options, with the elimination of eMagin's equity accounts.
(e) Reflects the estimate of expenses to be incurred in connection with the
Merger of approximately $600,000, plus approximately 327,000 common shares
issued as part of a finder's fee, valued at $7.00 per share, recorded as
additional purchase price.
INCOME STATEMENT ADJUSTMENTS
(f) Reflects the amortization of purchase price to be allocated over a 5-year
amortization period. Actual amortization for future periods will be
dependent upon the final allocation of purchase price, when completed, to
identifiable intangible assets, in-process research and development and
goodwill, if any, and the evaluation of appropriate useful lives for such
assets. The Company is currently in the process of evaluating the fair
values of assets acquired, including identifiable intangible assets, if
any. Additionally, considering that eMagin is a development stage entity,
and has been since its inception in 1992, management expects that a portion
of the purchase price will be attributable to purchased in-process research
and development, and that amount may be significant. In accordance with
Statement of Financial Accounting Standards No. 2, "Accounting for Research
and Development Costs", as clarified by Financial Accounting Standards
Board Interpretation No. 4, amounts assigned to in-process research and
development will be charged to expense as part of the allocation of
purchase price.
(g) Eliminates interest expense that would not have been incurred if bridge
loans were converted at the beginning of the year.
(h) Reflects the weighted average number of shares outstanding for the year,
after giving effect to the Merger, calculated as the historical weighted
average common shares for Fashion Dynamics, reduced by 7,638,670 shared
cancelled by Fashion Dynamics' majority shareholder, plus shares issued in
connection with the private placement, shares issued to eMagin and shares
issued as part of the cost of the transaction relating to the Merger.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FASHION DYNAMICS CORP.,
FED CAPITAL ACQUISITION CORPORATION,
AND
FED CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
I. THE MERGER .....................................................................................................1
Section 1.01 THE MERGER......................................................................................1
Section 1.02 EFFECTIVE TIME..................................................................................2
Section 1.03 CLOSING.........................................................................................2
Section 1.04 CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION...........................2
Section 1.05 CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE PARENT .........................................2
II. STATUS AND CONVERSION OF SECURITIES; OTHER AGREEMENTS...........................................................3
Section 2.01 CAPITAL STOCK OF FED AND THE MERGER-SUB.........................................................3
Section 2.02 CAPITAL STOCK OF THE PARENT.....................................................................3
Section 2.03 STOCK OPTION PLAN...............................................................................3
Section 2.04 CAPITAL STRUCTURE OF THE PARENT.................................................................4
Section 2.05 EXCHANGE OF FED CAPITAL STOCK AND FED CONVERTIBLE SECURITIES....................................4
<PAGE>
III. REPRESENTATIONS AND WARRANTIES .................................................................................4
Section 3.01 REPRESENTATIONS AND WARRANTIES OF FED...........................................................4
Section 3.02 REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE MERGER-SUB................................21
IV. COVENANTS .....................................................................................................27
Section 4.01 COVENANTS OF THE PARENT AND THE MERGER-SUB.....................................................27
Section 4.02 COVENANTS OF FED...............................................................................30
Section 4.03 DIRECTORS'AND OFFICERS'INSURANCE...............................................................33
Section 4.04 AMEX LISTING...................................................................................33
V. CONDITIONS.....................................................................................................33
Section 5.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.....................................33
Section 5.02 CONDITIONS TO OBLIGATIONS OF THE PARENT AND THE MERGER-SUB.....................................34
Section 5.03 CONDITIONS TO OBLIGATION OF FED TO EFFECT THE MERGER...........................................35
VI. TERMINATION....................................................................................................36
Section 6.01 TERMINATIon....................................................................................36
Section 6.02 BREAK-UP FEE...................................................................................38
VII. INDEMNIFICATION................................................................................................38
Section 7.01 INDEMNIFICATION BY THE PARENT..................................................................38
Section 7.02 INDEMNIFICATION BY FED.........................................................................38
VIII. MISCELLANEOUS..................................................................................................39
Section 8.01 FURTHER ACTIONS................................................................................39
Section 8.02 AVAILABILITY OF EQUITABLE REMEDIES.............................................................39
Section 8.03 SURVIVAL.......................................................................................39
Section 8.04 MODIFICATION...................................................................................40
Section 8.05 NOTICES........................................................................................40
Section 8.06 WAIVER.........................................................................................41
Section 8.07 BINDING EFFECT.................................................................................41
Section 8.08 NO THIRD-PARTY BENEFICIARIES...................................................................41
Section 8.09 SEVERABILITY...................................................................................41
8.10 MERGER; ASSIGNABILITY..........................................................................41
Section 8.11 HEADINGS.......................................................................................41
Section 8.12 COUNTERPARTS; GOVERNING LAW; JURISDICTION......................................................42
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FASHION DYNAMICS CORP.
FED CAPITAL ACQUISITION CORPORATION,
AND
FED CORPORATION
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), is dated
as of March 13, 2000, by and among FASHION DYNAMICS CORP., a Nevada corporation,
whose address is 1177 West Hastings Street, Suite 2000, Vancouver, British
Columbia V6E 2K3 (the "PARENT"), FED CAPITAL ACQUISTION CORPORATION, a Delaware
corporation and wholly-owned subsidiary of Parent, whose address is 1177 West
Hastings Street, Suite 2000, Vancouver, British Columbia V6E 2K3 (the
"MERGER-SUB"), and FED CORPORATION, a Delaware corporation, whose address is
1580 Route 52, Hopewell Junction, NY 12633 ("FED," and together with Merger-Sub
the "CONSTITUENT ENTITIES"). FED shall be the surviving corporation of the
proposed merger between the Merger-Sub and FED and, in such capacity, FED shall
sometimes be referred to herein as the "SURVIVING CORPORATION."
W I T N E S S E T H:
WHEREAS, the respective Board of Directors of the Parent, the
Merger-Sub and FED have determined that it is advisable and in the best
interests of their respective equity owners to consummate the business
combination transaction provided for herein in which the Merger-Sub would merge
(the "MERGER") with and into FED; and
WHEREAS, Parent, the Merger-Sub, and FED desire to make
certain agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the mutual premises,
covenants, and agreements set forth in this Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
I. THE MERGER.
SECTION 1.01 THE MERGER
At the Effective Time (as defined in Section 1.02), upon the
terms and subject to the conditions of this Agreement, the Merger-Sub shall be
merged with and into FED in
<PAGE>
accordance with the Delaware General Corporation Law (the "DGCL"). FED shall be
the surviving corporation in the Merger, and the name of the Surviving
Corporation shall be "FED Corporation." As a result of the Merger, all
outstanding shares of capital stock of FED (the "FED CAPITAL STOCK"), and any
options, warrants, rights, calls, subscriptions or other securities convertible
into or exchangeable for FED Capital Stock ("FED CONVERTIBLE SECURITIES") shall
be converted in the manner provided in Article II.
SECTION 1.02 EFFECTIVE TIME
At the Closing (as defined in Section 1.03), a certificate
of merger (the "CERTIFICATE OF MERGER") shall be duly prepared by the Surviving
Corporation and delivered to the Secretary of State of Delaware for filing as
provided in the DGCL, on, or as soon as practicable after, the Closing Date (as
defined in Section 1.03). The Merger shall become effective as soon as the
Certificate of Merger has been filed with the Secretary of State of Delaware
(the date and time when such condition has been satisfied being referred to
herein as the "EFFECTIVE TIME").
SECTION 1.03 CLOSING
The closing of the Merger (the "CLOSING") will take place at the
offices of Preston Gates & Ellis LLP, 701 Fifth Avenue, Suite 5000, Seattle, WA
98104-7078 on or before March 17, 2000 or such later date as mutually acceptable
to FED and Parent (the "CLOSING DATE"). At the Closing, there shall be delivered
to FED and the Parent the certificates and other documents and instruments
required to be delivered under Article V. The Closing will be effective as of
the Effective Time.
SECTION 1.04 CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE
SURVIVING CORPORATION
At the Effective Time, (i) the Certificate of Incorporation
of FED in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, (ii) the By-Laws of
FED as in effect immediately prior to the Effective Time shall be the By-Laws of
the Surviving Corporation, and (iii) all of the estate, properties, rights,
privileges, powers and franchises of FED and all of its property, real, personal
and mixed, and all debts and obligations of any kind of FED shall vest in the
Surviving Corporation, without any further act or deed being required therefor.
The Certificate of Incorporation and By-Laws of FED as in effect as of the date
hereof and to be in effect as of the Effective Time are attached hereto as
EXHIBITS 1.04-1 and 1.04-2, respectively.
SECTION 1.05 CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE PARENT
The Certificate of Incorporation and By-Laws of the Parent
as in effect as of the date hereof and to be in effect as of the Effective Time
are attached hereto as EXHIBITS 1.05-1 and
<PAGE>
1.05-2, respectively.
II. STATUS AND CONVERSION OF SECURITIES; OTHER AGREEMENTS.
SECTION 2.01 COMMON STOCK OF FED AND THE MERGER-SUB
(a) Each share of common stock, par value $0.001 per share,
of the Merger-Sub outstanding immediately prior to the Closing shall remain
outstanding and shall, by virtue of the Merger and without any further action on
the part of the holders thereof, be converted into one thousand (1,000) shares
of common stock, par value $0.001 per share, of the Surviving Corporation (the
"SURVIVING CORPORATION COMMON STOCK"), so that at the Effective Time, the Parent
shall be the holder of all of the issued and outstanding shares of the Surviving
Corporation Common Stock.
(b) All shares of FED Common Stock and all FED Convertible
Securities issued and outstanding prior to the Closing (excluding 1,188,180
option shares held by FED optionholders (the "Additional Options")) shall be
converted into shares of common stock, $0.001 par value (the "PARENT COMMON
STOCK"), or equivalent convertible securities ("PARENT CONVERTIBLE SECURITIES"),
as applicable, of the Parent in an aggregate amount equal to Eleven Million One
Hundred Fifty Thousand Three Hundred Fourteen (11,150,314) shares of Parent
Common Stock and Parent Convertible Securities. Each share of FED Common Stock
(and each FED Convertible Security to purchase one share of FED Common Stock)
shall be exchangeable for that certain amount of Parent Common Stock represented
by a fraction, the numerator of which is 11,150,314 and the denominator of which
is equal to the aggregate of the number of shares of FED Common Stock and all
warrants and options comprising all FED Convertible Securities issued and
outstanding as of the Closing Date. The Additional Options shall be converted
into options to purchase shares of Parent Common Stock on the same basis as the
Parent Convertible Securities based on the same ratio as set forth in the
preceding sentence. As of the Closing Date the former holders of FED Common
Stock and FED Convertible Securities (collectively the "FORMER FED
STOCKHOLDERS") shall effectively own approximately forty-two percent (42%) of
the outstanding Parent Common Stock, on a fully diluted basis.
SECTION 2.02 CAPITAL STOCK OF THE PARENT
Immediately prior to the Effective Time, the Parent shall
have an aggregate of Twenty Million One Hundred Fifty-six Thousand Four Hundred
(20,156,400) shares of Parent Common Stock issued, including Three Million Four
Hundred Sixty Four Thousand Five Hundred Forty Seven (3,464,547) shares of
Parent Common Stock to be sold in a private placement pursuant to Rule 506
and/or Regulation S promulgated under the Securities Act of 1933 (the "PRIVATE
PLACEMENT").
<PAGE>
SECTION 2.03 STOCK OPTION PLAN
The Parent's Stock Option Plan (the "STOCK OPTION PLAN") is
attached hereto as EXHIBIT 2.03, pursuant to which the Parent reserved for
issuance thereunder Three Million Nine Hundred Thousand (3,900,000) shares of
Parent Common Stock. At or prior to Closing, Parent shall file a registration
statement on Form S-8 with the Securities and Exchange Commission ("SEC") to
register the issuance and sale of Parent Common Stock upon exercise of options
granted under the Stock Option Plan.
SECTION 2.04 CAPITAL STRUCTURE OF THE PARENT.
(a) As of the Closing Date, and as of the Effective Time,
the Parent shall have cash on account of not less than Twenty-seven Million Two
Hundred Fifty Thousand Dollars ($25,916,667) less (i) the total aggregate
principal amount of promissory notes made by FED contributed to Parent in
exchange for the issuance of Parent Common Stock (the "NOTES"); and (ii) fees
and expenses incurred by or on behalf of Parent in connection with this
Agreement and the transactions contemplated hereby, including, but not limited
to, fees and expenses of counsel, exchange listing fees and premium payments for
directors & officers' insurance.
(b) As of the Effective Time, the Parent shall have
Seventy-six Million Three Hundred Fifty Thousand (76,350,000) authorized shares
of Parent Common Stock. An aggregate of Eleven Million One Hundred Fifty
Thousand Three Hundred Fourteen (11,150,314) shares of Parent Common Stock and
Parent Convertible Securities shall be issued to the Former FED Stockholders,
and Fifteen Million Two Hundred Forty-five Thousand Three Hundred Twenty-one
(15,245,321) shares of Parent Common Stock shall be held by the stockholders of
the Parent.
SECTION 2.05 EXCHANGE OF FED CAPITAL STOCK AND FED CONVERTIBLE
SECURITIES
(a) The Parent shall authorize one or more persons to act as
a transfer and exchange agent hereunder (the "EXCHANGE AGENT") pursuant to an
agreement (the "EXCHANGE AGENT AGREEMENT") in a form to be agreed upon by the
parties hereto. Promptly after the Closing, the Parent shall deposit or cause to
be deposited with the Exchange Agent the certificates representing the shares of
Parent Common Stock and Parent Convertible Securities issuable to the holders of
FED Capital Stock and FED Convertible Securities, as applicable.
(b) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding shares of FED Capital Stock and FED Convertible Securities
(collectively the "FED CERTIFICATES") a form letter of transmittal (which shall
specify that delivery shall be effective, and risk of loss and title to the FED
Certificates shall pass, only upon delivery of the FED Certificates to the
Exchange Agent) and instructions for such holder's
<PAGE>
use in effecting surrender of the FED Certificates in exchange for certificates
representing shares of Parent Common Stock and Parent Convertible Securities, as
applicable.
(c) After the Effective Time, holders of FED Capital Stock
and FED Convertible Securities shall cease to be, and shall have no rights as,
stockholders of FED, other than (i) to receive shares of Parent Common Stock
into which such shares have been converted pursuant to the provisions hereof,
and (ii) any rights afforded to any such holder who has demanded appraisal
rights in compliance with all provisions of the DGCL concerning the right of
such holder to dissent from the Merger and demand appraisal of such shares of
FED Capital Stock.
(d) As of the Effective Time, each holder of a FED
Certificate shall surrender the same at the principal offices of the Exchange
Agent, and shall be entitled to receive in exchange therefor a certificates of
the Parent reflecting the amount of Parent Common Stock and Parent Convertible
Securities, as applicable, to be received by such holder.
(e) If any FED Certificate shall have been lost, stolen, or
destroyed, Exchange Agent will, upon receipt (i) of appropriate evidence as to
such loss, theft, or destruction and to the ownership of such FED Certificate by
the person claiming such FED Certificate to be lost, stolen, or destroyed, and
(ii) of appropriate and customary indemnification, issue in exchange for such
lost, stolen, or destroyed FED Certificate the shares of Parent Common Stock
deliverable in respect thereof pursuant to Section 2.01(b) hereof and this
Section 2.05.
(f) If any certificate representing shares of Parent Common
Stock is to be issued in a name other than that in which the FED Certificate
surrendered in exchange therefore is registered, it shall be a condition to the
issuance thereof that the FED Certificate so surrendered shall be properly
indorsed (or accompanied by an appropriate instrument of transfer) and otherwise
in proper form for transfer (including without limitation that the signature of
the transferor shall be properly guaranteed by a commercial bank, trust company
or member firm of the New York Stock Exchange), and that the individual or
entity requesting such exchange shall pay to the Parent in advance any transfer
or other taxes required by reason of the issuance of a certificate representing
shares of Parent Common Stock in any name other than that of the registered
holder of the FED Certificate surrendered, or required for any other reason, or
shall establish to the satisfaction of Parent that such tax has been paid or is
not payable.
III. REPRESENTATIONS AND WARRANTIES.
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF FED
Except as set forth in the Disclosure Schedule of FED
attached hereto (the "FED DISCLOSURE SCHEDULE"), FED, on the date hereof and as
of the time of Closing, represents and warrants, as to itself and, unless
otherwise stated or the context indicates otherwise, as to the
<PAGE>
Company Subsidiary (as defined below), to the Parent and the Merger-Sub as
follows in this Section 3.01. For purposes of this Section 3.01, "knowledge,"
"know," or "known" means actual knowledge after due inquiry.
(a) ORGANIZATION AND QUALIFICATION; COMPANY SUBSIDIARY.
(i) FED is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full power and authority to conduct its business as and to the extent now
conducted, and currently proposed to be conducted, and to own, use and lease its
assets and properties, except for such failures to have such power and authority
which, individually or in the aggregate, do not and are not reasonably expected
to have a Material Adverse Effect (as defined in this Section 3.01(a)) on FED.
FED is duly qualified, licensed or admitted to do business and is in good
standing in New York. As used in this Agreement, a "MATERIAL ADVERSE EFFECT"
shall mean a material adverse effect on the businesses, properties, assets,
prospects, condition (financial or otherwise) or results of operations of an
entity (or group of entities taken as a whole). Notwithstanding the foregoing, a
Material Adverse Effect shall not include any change in political or economic
matters of general applicability. Except for the Company Subsidiary (as defined
below), FED does not directly or indirectly own any equity or similar interest
in, or any interest convertible into or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
(ii) The Company has exactly one (1) subsidiary,
which is Virtual Vision, Inc. (the "COMPANY SUBSIDIARY"). The Company Subsidiary
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware, has all requisite power and authority to own,
lease, and operate its properties and to carry on its business as now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which a failure to so qualify would have a Material Adverse
Effect on the Business Condition of the Company. The Company Subsidiary is duly
qualified and in good standing to do business in each jurisdiction in which a
failure to so qualify would have a Material Adverse Effect on the Business
Condition of the Company. All of the outstanding shares of capital stock or
similar equity interests of the Company Subsidiary have been validly issued, are
fully paid and nonassessable, and are owned by the Company. The Company
Subsidiary is not a party to, or otherwise subject to any legal restriction or
any agreement (other than this Agreement and customary limitations imposed by
corporate statutes) restricting the ability of the Company Subsidiary to pay
dividends out of profits or make any other similar distributions of profits to
the Company. Unless otherwise stated or where the context provides otherwise in
this Section 3.01, all representations and warranties made by FED in this
Section 3.01 shall also be deemed to be made by the Company Subsidiary.
(b) ORGANIZATIONAL DOCUMENTS; CAPITAL STOCK
<PAGE>
(i) Attached hereto as EXHIBITS 1.04-1 and 1.04-2,
respectively, are true and complete copies of the Certificate of
Incorporation and By-Laws of FED.
(ii) The authorized capital stock of FED consists
solely of Fifty-five Million (55,000,000) shares of FED Capital Stock,
comprised of Fifty Million (50,000,000) shares of common stock and Five
Million (5,000,000) shares of preferred stock, and of which Four
Million Seven Hundred Fifty Two Thousand Nine Hundred Ninety Seven
(4,752,997) shares of common stock and no shares of preferred stock are
issued and outstanding. Attached hereto as EXHIBIT 3.01(B)(ii) is a
true and complete list of all stockholders of FED and each such
stockholder's respective ownership of FED Capital Stock.
(iii) Attached hereto as EXHIBIT 3.01(B)(iii) is a
true and complete table of all outstanding or authorized FED
Convertible Securities. Except as contemplated hereby, there are no
outstanding options, warrants, calls, subscriptions, rights, agreements
or other commitments of any character (contingent or otherwise)
obligating FED to issue, sell, repurchase, redeem, or otherwise acquire
any shares of the FED Capital Stock or FED Convertible Securities.
(iv) There are no outstanding contractual obligations
of FED to repurchase, redeem, or otherwise acquire any FED Capital
Stock.
(v) As of the Effective Time, FED will not have more
than thirty-five (35) stockholders who do not qualify as "accredited
investors," as that term is defined in Regulation D of the SEC
regulations promulgated under the Securities Act of 1933. Any stock
buy-back undertaken by FED complied with all applicable federal and
state securities laws, including financial and other information
requirements.
(c) AUTHORITY RELATIVE TO THIS AGREEMENT. FED has full power
and authority to enter into this Agreement and to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution,
delivery, and performance of this Agreement by FED and the consummation by FED
of the Merger and the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of FED, and upon the approval of the
stockholders of FED, no other proceedings on the part of FED will be necessary
to authorize the execution, delivery, and performance of this Agreement by FED
and the consummation by FED of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by FED, and
constitutes the legal, valid, and binding obligation of FED enforceable against
FED in accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer or
similar laws affecting the enforcement of creditors' rights generally and
general principles of equity (whether considered in a proceeding at law or in
equity).
<PAGE>
(d) NON-CONTRAVENTION; APPROVALS AND CONSENTS
(i) The execution and delivery of this Agreement by
FED does not, and the performance by FED of its obligations hereunder
and the consummation of the transactions contemplated hereby will not,
conflict with, result in a violation or breach of, constitute (with or
without notice or lapse of time or both) a default under, result in or
give to any person any right of payment or reimbursement, termination,
cancellation, modification or acceleration of, or result in the
creation or imposition of any lien, claim, mortgage, encumbrance,
pledge, security interest, equity, or charge of any kind (any of the
foregoing, a "LIEN") upon any of the assets or properties of FED under
any of the terms, conditions, or provisions of (x) the Certificate of
Incorporation of FED, (y) any statute, law, rule, regulation, or
ordinance (collectively, "LAWS"), or any judgment, decree, order, writ,
permit, or license (collectively, "ORDERS"), of any court, tribunal,
arbitrator, authority, agency, commission, official, or other
instrumentality of the United States, any foreign country, or any
domestic or foreign state, county, city, or other political subdivision
(a "GOVERNMENTAL OR REGULATORY AUTHORITY"), applicable to FED or any of
its assets or properties, or (z) any note, bond, mortgage, security
agreement, indenture, license, franchise, permit, concession, contract,
lease (capital or operating) or other instrument, obligation, or
agreement of any kind (collectively, "CONTRACTS") to which FED is a
party or by which FED or any of its assets or properties is bound,
excluding from the foregoing clauses (y) and (z) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations and
creations, and impositions of Liens which, individually or in the
aggregate, could not be reasonably expected to have a Material Adverse
Effect on FED or on its ability to consummate the transactions
contemplated by this Agreement.
(ii) Except (x) for the filing of the Certificate of
Merger and other appropriate merger documents required by the DGCL with
the Secretary of State of Delaware and, and (y) for the approval of
stockholders of FED, no consent, approval, or action of, filing with,
or notice to any Governmental or Regulatory Authority or other public
or private third party is necessary or required under any of the terms,
conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any Contract to which FED is a party or by
which FED or any of its assets or properties is bound for the execution
and delivery of this Agreement by FED, the performance by FED of its
obligations hereunder or the consummation of the transactions
contemplated hereby, except for such consents, approvals, or actions
of, filings with or notices to any Governmental or Regulatory Authority
or other public or private third party the failure of which to make or
obtain could not reasonably be expected to have a Material Adverse
Effect on FED, the Surviving Corporation, or on FED's ability to
consummate the transactions contemplated by this Agreement.
(e) LEGAL PROCEEDINGS. There are no actions, suits,
arbitrations, or proceedings pending, nor to the knowledge of FED, threatened
against, relating to or affecting, FED or the
<PAGE>
Subsidiary or any of their assets and properties. FED is not subject to any
judgment, decree, court order, or writ of any Governmental or Regulatory
Authority.
(f) TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS.
(i) The "FED INTELLECTUAL PROPERTY" consists of
the following:
A. all patents, trademarks, trade names,
service marks, mask works, domain names, copyrights and any
renewal rights, applications and registrations for any of the
foregoing, and all trade dress, supplier lists, trade secrets,
know-how, moral rights, computer software programs or
applications (in both source and object code form) owned by
FED;
B. all goodwill associated with
trademarks, trade names service marks and trade dress owned by
FED;
C. all software and firmware listings,
and updated software source code, and complete system build
software and instructions related to all software described
herein owned by FED;
D. all documents, records and files
relating to design, end user documentation, manufacturing,
quality control, sales, marketing or customer support for all
intellectual property described herein owned by FED;
E. all other tangible or intangible
proprietary information and materials owned by FED; and
F. all license and other rights in any third
party product, intellectual property, proprietary or personal
rights, documentation, or tangible or intangible property,
including without limitation the types of intellectual
property and tangible and intangible proprietary information
described in (A) through (E) above that are being, and/or have
been, used, or are currently under development for use, in the
business of FED as it has been, is currently or is currently
anticipated to be (up to the Closing), conducted. FED
Intellectual Property described in clauses (A) to (E) above is
referred to herein as "FED Owned Intellectual Property" and
FED Intellectual Property described in clause (F) above is
referred to herein as "FED Licensed Intellectual Property."
Unless otherwise noted, all references to "FED Intellectual
Property" shall refer to both FED Owned Intellectual Property
and FED Licensed Intellectual Property.
(ii) SCHEDULE 3.01(f) lists: (i) all patents,
registered copyrights, trademarks, service marks, trade dress,
any renewal rights for any of the foregoing,
<PAGE>
and any applications and registrations for any of the
foregoing, that are included in the FED Owned Intellectual
Property; (ii) all hardware products and tools, software
products and tools, and services that are currently
published, offered, or under development by FED; (iii) all
material licenses, sublicenses and other agreements to which
FED is a party and pursuant to which any other person is
authorized to have access to or use the FED Owned
Intellectual Property or exercise any other right with
regard thereto; and (iv) all FED Licensed Intellectual
Property (other than license agreements for standard "shrink
wrapped, off the shelf," commercially available, third party
products used by FED). The disclosures described in (iii),
(iv) and (v) hereof include the names and dates of the
relevant agreements, as well as the identities of the
parties thereto.
(iii) The FED Intellectual Property consists solely
of items and rights that are either: (i) owned by FED, (ii) in
the public domain, or (iii) rightfully used and authorized for
use by FED and its successors pursuant to a valid license or
other agreement. FED has all rights in the FED Intellectual
Property reasonably necessary to carry out FED's current, and
anticipated future (up to the Closing) activities and has or
had all rights in the FED Intellectual Property reasonably
necessary to carry out FED's former activities, including
without limitation, if necessary to carry out such activities,
rights to make, use, exclude others from using, reproduce,
modify, adapt, create derivative works based on, translate,
distribute (directly and indirectly), transmit, display and
perform publicly, license, rent, lease, assign, and sell the
FED Intellectual Property in all geographic locations and
fields of use, and to sublicense any or all such rights to
third parties, including the right to grant further
sublicenses. All material software and firmware listings that
are part of the FED Owned Intellectual Property are adequately
commented in accordance with current software industry
standards.
(iv) FED is not, nor as a result of the execution or
delivery of this Agreement, or performance of FED's
obligations hereunder, will FED be, in violation of any
license, sublicense or other agreement relating to the FED
Intellectual Property to which FED is a party or otherwise
bound. FED is not obligated to provide any consideration
(whether financial or otherwise) to any third party, nor is
any third party otherwise entitled to any consideration, with
respect to any exercise of rights by FED or its successors in
the FED Intellectual Property.
(v) To the knowledge of FED, the use, reproduction,
modification, distribution, licensing, sublicensing, sale, or
any other exercise of rights in any FED Owned Intellectual
Property or any other authorized exercise of rights in or to
the FED Owned Intellectual Property by FED or its licensees
does not and will not infringe any copyright, patent, trade
secret, trademark, service mark, trade name, firm
<PAGE>
name, logo, trade dress, moral right, other intellectual
property right, right of privacy, right of publicity or
right in personal or other data of any person. Further, to
the knowledge of FED, the use, reproduction, modification,
distribution, licensing, sublicensing, sale, or any other
exercise of rights in any FED Licensed Intellectual Property
or any other authorized exercise of rights in or to the FED
Licensed Intellectual Property by FED or its licensees does
not and will not infringe any copyright, patent, trade
secret, trademark, service mark, trade name, firm name,
logo, trade dress, moral right, other intellectual property
right, right of privacy, right of publicity or right in
personal or other data of any person. No claims (i)
challenging the validity, effectiveness, or ownership by FED
of any of the FED Owned Intellectual Property, or (ii) to
the effect that the use, reproduction, modification,
manufacturing, distribution, licensing, sublicensing, sale
or any other exercise of rights in any FED Owned
Intellectual Property by FED or its licensees infringes, or
will infringe on, any intellectual property or other
proprietary or personal right of any person, have been
asserted or, to the knowledge of FED, are threatened by any
person nor, to the knowledge of FED, are there any valid
grounds for any bona fide claim of any such kind. All
granted or issued patents and mask works and all registered
trademarks listed on the FED Disclosure Schedule and all
copyright registrations held by FED are valid, enforceable
and subsisting. To the knowledge of FED, there is no
material unauthorized use, infringement or misappropriation
of any of the FED Owned Intellectual Property by any third
party, employee or former employee.
(vi) No parties other than FED possess any current or
contingent rights to any source code that is part of the FED
Owned Intellectual Property (including, without limitation,
through any escrow account).
(vii) SCHEDULE 3.01(f) lists all parties who have
created any material portion of, or otherwise have any rights
in or to, the FED Owned Intellectual Property other than
employees of FED whose work product was created by them
entirely within the scope of their employment by FED and
constitutes works made for hire owned by FED. FED has secured
from all parties who have created any material portion of, or
otherwise have any rights in or to, the FED Owned Intellectual
Property valid and enforceable written assignments or licenses
of any such work or other rights to FED and has provided true
and complete copies of such assignments or licenses to Parent.
(viii) SCHEDULE 3.01(f) includes a true and complete
list of support and maintenance agreements relating to FED
Owned Intellectual Property or to which FED is a party as to
FED Licensed Intellectual Property including the identity of
the parties and the respective dates of such agreements and
remedies for their breach.
<PAGE>
(ix) FED has obtained legally binding written
agreements from all employees and third parties with whom FED
has shared confidential proprietary information (i) of FED, or
(ii) received from others which FED is obligated to treat as
confidential, which agreements require such employees and
third parties to keep such information confidential.
(x) FED has obtained any and all necessary consents
from consumers with regard to FED's collection and
dissemination of personal consumer information in accordance
with FED's privacy policy as published on its website. FED's
practices regarding the collection and use of consumer
personal information are in accordance with FED's privacy
policy as published on its website.
(xi) To the knowledge of FED, the FED Owned
Intellectual Property is, and any products manufactured and
commercially released by FED or currently under development,
are fully Year 2000 Compliant in all material respects and
will not cease to be fully Year 2000 Compliant in any material
respect at any time prior to, during or after the calendar
year 2000. To the best of FED's knowledge, the FED Licensed
Intellectual Property is fully Year 2000 Compliant in all
material respects and will not cease to be fully Year 2000
Compliant in any material respect at any time prior to, during
or after the calendar year 2000. For the purposes of this
Agreement, "Year 2000 Compliant" means that neither the
performance nor the functionality of the applicable FED
Intellectual Property or applicable product is or will be
materially affected by dates prior to, during or after the
calendar year 2000 and in particular (but without limitation):
A. such FED Intellectual Property or product
accurately receives, provides and processes, and will
accurately receive, provide and process, date/time data
(including calculating, comparing and sequencing) from, into
and between the twentieth and twenty-first centuries,
including calendar years 1999 and 2000;
B. such FED Intellectual Property or product
will not malfunction, cease to function, provide invalid or
incorrect results or cause any interruption in the operation
of the business of FED as a result of any date/time data-based
functionality.
C. data-based functionality of such FED
Intellectual Property or product behaves and will continue to
behave consistently for dates prior to, during and after the
year 2000;
D. in all interfaces and data storage of
such FED Intellectual
<PAGE>
Property or product, the century in any date is and will be
specified either explicitly or by unambiguous algorithms or
inferencing rules; and
E. the year 2000 is and will be recognized
as a leap year of such FED Intellectual Property or product.
(g) FINANCIAL STATEMENTS. FED has delivered to Parent audited
balance sheets as of December 31, 1997, 1998 and 1999, the related audited
statements of income for the year ended December 31, 1997, 1998, and 1999 (such
balance sheets and statements of income are collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements: (i) are in accordance with
the books and records of FED, (ii) present fairly, in all material respects, the
financial position of FED as of the date indicated and the results of its
operations for each of the periods indicated, and (iii) have been prepared in
accordance with generally accepted accounting principles consistently applied
except as described in SCHEDULE 3.01(g)-1. There are no material off-balance
sheet liabilities, claims or obligations of any nature, whether accrued,
absolute, contingent, anticipated, or otherwise, whether due or to become due,
that are not shown or provided for either in the Financial Statements or
SCHEDULE 3.01(g)-1. The liabilities of FED were incurred in the ordinary course
of FED's business.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31,
1999 there has not been:
(i) Any transaction involving more than $50,000
entered into by FED other than in the ordinary course of
business; any change (or any development or combination of
developments of which FED has knowledge which is reasonably
likely to result in such a change) in FED's business
condition, other than (i) changes which in the aggregate have
not been materially adverse to FED's business condition, (ii)
any material adverse change that results from or arises out of
general economic, business or industry conditions or (iii) any
material adverse change that results from or arises out of the
announcement or pendency of the transactions contemplated by
this Agreement; or, without limiting the foregoing, any loss
of or damage to any of the properties of FED due to fire or
other casualty, or any other loss, whether or not insured,
amounting to more than $50,000 in the aggregate;
(ii) Any declaration, payment, or setting
aside of any dividend or other distribution to or for the
holders of any FED Capital Stock;
(iii) Any termination, modification, or
rescission of, or waiver by FED of rights under, any existing
contract having or likely to have a material adverse effect on
FED's business condition;
<PAGE>
(iv) Any discharge or satisfaction by FED of
any lien or encumbrance, or any payment of any obligation or
liability (absolute or contingent) other than liabilities
shown on the balance sheet included in the Financial
Statements as of December 31, 1999 and liabilities incurred
since December 31, 1999 in the ordinary course of business; or
(v) Any mortgage, pledge, imposition of any
security interest, claim, encumbrance, or other restriction on
any of the assets, tangible or intangible, of Company having
or likely to have a material adverse effect on FED's business
condition.
(i) ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters
reflected or reserved against in the FED Balance Sheet, FED did not have at such
date and has not incurred since that date, any liabilities or obligations
(whether absolute, accrued, contingent, fixed or otherwise, or whether due or to
become due) of any nature, except liabilities or obligations which were incurred
in connection with this Agreement and the transactions contemplated hereby,
which were incurred in the ordinary course of business consistent with past
practice.
(j) INFORMATION SUPPLIED. Nothing in this Agreement or any
schedule, annex or exhibit hereto, or in Exhibit D to the Private Placement
Memorandums of Parent dated January 31, 2000 and February 15, 2000 or any
documentation distributed therewith, contains any untrue statement of a material
fact, or omits any statement of a material fact required to be stated or
necessary in order to make the statements contained herein or therein not
misleading. There is no fact known to FED which materially and adversely affects
FED or the Surviving Corporation, which has not been set forth in this Agreement
or in the schedules, annexes, certificates, documents, or statements in writing
furnished by FED in connection with the transactions contemplated by this
Agreement.
(k) COMPLIANCE WITH LAWS AND ORDERS. FED holds all permits,
licenses, variances, exemptions, orders, and approvals of all Governmental and
Regulatory Authorities necessary for the lawful conduct of its business (the
"FED PERMITS"), except for failures to hold such permits, licenses, variances,
exemptions, orders, and approvals which, individually or in the aggregate, do
not and are not reasonably expected to have a Material Adverse Effect on FED.
FED is in compliance with the terms of the FED Permits, except failures so to
comply which, individually or in the aggregate, do not have and are not
reasonably expected to have a Material Adverse Effect on FED. FED is not in
violation of, or in default under, any Law or Order of any Governmental or
Regulatory Authority, except for violations which, individually or in the
aggregate, do not and are not reasonably expected to have a Material Adverse
Effect on FED.
(l) COMPLIANCE WITH AGREEMENTS; CERTAIN AGREEMENTS. Neither
FED, nor to the knowledge of FED, any other party thereto, is in breach or
violation of, or in default in the performance or observance of any term or
provision of, and no event has occurred which, with
<PAGE>
notice or lapse of time or both, is reasonably expected to result in a default
under, (x) the Certificate of Incorporation of FED or (y) any material Contract
to which FED is a party or by which FED or any of its assets or properties is
bound, except in the case of clause (y) for breaches, violations, and defaults
which, individually or in the aggregate, do not and are not reasonably expected
to have a Material Adverse Effect on FED.
(m) BROKERS. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried out by FED and its
affiliates directly with the Parent and the Merger-Sub without the intervention
of any person on behalf of FED and its affiliates in such manner as to give rise
to any valid claim by any person against FED, the Parent, or the Surviving
Corporation for a finder's fee, brokerage commission, or similar payment.
(n) CONSENTS WITHOUT ANY CONDITION. FED has not made any
agreement or reached any understanding not approved by the Parent and the
Merger-Sub as a condition for obtaining any consent, authorization, approval,
order, license, certificate, or permit required for the consummation of the
transactions contemplated by this Agreement.
(o) TAX MATTERS.
(i) FED has filed all tax returns required to be
filed by applicable law prior to the Closing. All tax returns were
(and, as to tax returns not filed as of the date hereof, will be) true,
complete, and correct and filed on a timely basis. FED (x) has paid all
taxes due, or claimed or asserted in writing by any taxing authority to
be due, for the periods covered by such tax returns or (y) has duly and
fully provided reserves (in accordance with GAAP) adequate to reflect
all such taxes.
(ii) FED has established (and until the Closing will
maintain) on its books and records reserves adequate to reflect all
material taxes not yet due and payable. FED has made available to the
Parent and the Merger-Sub complete, and accurate copies of all work
papers associated with the calculation of FED's tax reserves.
(iii) There are no tax liens upon the assets of FED.
(iv) FED has not requested (and no request has been
made on its behalf) any extension of time within which to file any
material tax return.
(v) (A) No income tax returns have been examined by
any taxing authorities for any periods; and (B) no deficiency for any
material taxes has been suggested, proposed, asserted, or assessed
against FED that has not been resolved and paid in full.
(vi) No audits or other administrative proceedings or
court proceedings
<PAGE>
are presently pending with regard to any taxes or tax returns of FED.
No written claim has been made by a taxing authority in a jurisdiction
where FED does not file tax returns such that it is or may be subject
to taxation by that jurisdiction.
(vii) To the extent requested by the Parent and the
Merger-Sub, FED has made available to the Parent and the Merger-Sub
(or, in the case of tax returns to be filed on or before the Closing,
will make available) complete and accurate copies of all tax returns
and associated work papers filed by or on behalf of FED for all taxable
years ending on or prior to the Closing.
(viii) No agreements relating to allocating or
sharing of any taxes have been entered into by FED.
(ix) FED has not entered into any transactions that
could give rise to an understatement of Federal Income Tax.
(x) None of FED or any other person on behalf of FED
has agreed to or is required to make any adjustments pursuant to
Section 481(a) of the Code or any similar provisions of state, local or
foreign law by reason of a change in accounting method initiated by FED
or has any application pending with any taxing authority requesting
permission for any change in accounting methods that relate to the
business or operations of FED, and FED has no knowledge that the IRS
has proposed any such adjustment or change in accounting method.
(xi) FED has not been, and is not now, a member of
any consolidated, combined, unitary or affiliated group of corporations
for any tax purposes.
(p) ACCOUNTS RECEIVABLE. All of the accounts receivable shown
on the balance sheet included in the Financial Statements as of December 31,
1999 have been collected or are good and collectible in the aggregate recorded
amounts thereof (less the allowance for doubtful accounts also appearing in such
December 31, 1999 balance sheet and net of returns and payment discounts
allowable by FED's policies) and can reasonably be anticipated to be paid in
full without outside collection efforts within ninety (90) days of the due date,
subject to no counterclaims or setoffs.
(q) LEASES IN EFFECT. All real property leases and subleases
as to which FED is a party and any amendments or modifications thereof are
listed on SCHEDULE 3.01(q) (each a "Lease" and collectively, the "Leases") are
valid, in full force and effect, enforceable, and there are no existing
defaults, and FED has not received or given notice of default or claimed default
with respect to any Lease, nor is there any event that with notice or lapse of
time, or both, would constitute a default thereunder, except for such defaults
that would not have a material adverse effect on FED's business condition.
<PAGE>
(r) PERSONAL PROPERTY. FED has good and marketable title, free
and clear of all title defects, security interests, pledges, options, claims,
liens, encumbrances, and restrictions of any nature whatsoever (including,
without limitation, leases, chattel mortgages, conditional sale contracts,
purchase money security interests, collateral security arrangements, and other
title or interest-retaining agreements) (collectively, the "ENCUMBRANCES") to
all inventory, receivables, furniture, machinery, equipment, and other personal
property, tangible or otherwise, reflected as owned on the balance sheets
included in the Financial Statements, except for acquisitions and dispositions
since December 31, 1999 in the ordinary course of business, except for (a) any
lien for current taxes not yet due and payable, (b) any statutory liens and (c)
minor liens that have arisen in the ordinary course of business and that do not
materially detract from the value of the assets subject thereto or materially
impair the operations of FED. SCHEDULE 3.01(r) lists (i) all computer equipment
having a book value of $5,000 or more and (ii) all other personal property
having a book value of $5,000 or more, which are used by FED in the conduct of
its business and all such equipment and property are in good operating condition
and repair, reasonable wear and tear excepted.
(s) CERTAIN TRANSACTIONS. None of the directors, officers, or
shareholders of FED, or any member of any of their families (as defined below),
is presently a party to, or was a party to during the year preceding the date of
this Agreement, any transaction with FED, including, without limitation, any
contract, agreement, or other arrangement (i) providing for the furnishing of
services to or by, (ii) providing for rental of real or personal property to or
from, or (iii) otherwise requiring payments to or from, any such person or any
corporation, partnership, trust, or other entity in which any such person has or
had a 5%-or-more interest (as a shareholder, partner, beneficiary, or otherwise)
or is or was a director, officer, employee, or trustee other than for services
rendered by the shareholders as employees of FED. None of FED's officers or
directors has any material interest in any property, real or personal, tangible
or intangible, including inventions, copyrights, trademarks or trade names, used
in or pertaining to the business of FED, or any supplier, distributor or
customer of FED, except for the normal rights of a shareholder, and except for
rights under existing employee benefit plans. For purposes of this Agreement
"FAMILIES" shall include all individuals who by reason of ancestry, adoption or
marriage have a common parent or grandparent.
(t) MAJOR CONTRACTS. FED is not a party to or subject to:
(i) Any union contract, or any
employment contract or arrangement providing for future
compensation, written or oral, with any officer, consultant,
director or employee;
(ii) Any plan or contract or
arrangement, written or oral, providing for bonuses,
pensions, deferred compensation, retirement payments,
profit-sharing, or the like;
<PAGE>
(iii) Any joint venture contract
or arrangement or any other agreement which has involved or
is expected to involve a sharing of profits;
(iv) Any OEM agreement,
distribution agreement, volume purchase agreement, corporate
end user sales or service agreement or manufacturing
agreement in which the amount involved exceeds annually, or
is expected to exceed in the aggregate over the life of the
contract $50,000 or pursuant to which FED has granted or
received manufacturing rights, most favored nation pricing
provisions or exclusive marketing, reproduction, publishing
or distribution rights related to any product, group of
products or territory;
(v) Any lease for real or
personal property in which the amount of payments which FED is
required to make on an annual basis exceeds $50,000;
(vi) Any material agreement,
license, franchise, permit, indenture or authorization which
has not been terminated or performed in its entirety and not
renewed which may be, by its terms, terminated, impaired or
adversely affected by reason of the execution of this
Agreement, the Closing of the Merger, or the consummation of
the transactions contemplated hereby or thereby;
(vii) Except for trade
indebtedness incurred in the ordinary course of business, any
instrument evidencing or related in any way to indebtedness
incurred in the acquisition of companies or other entities or
indebtedness for borrowed money by way of direct loan, sale of
debt securities, purchase money obligation, conditional sale,
guarantee, or otherwise which individually is in the amount of
$50,000 or more;
(viii) Any material license
agreement, either as licensor or licensee (excluding
nonexclusive hardware and software licenses granted to
distributors or end-users in the ordinary course of business
consistent with prior practice); or
(ix) Any contract containing
covenants purporting to limit FED's freedom to compete in any
line of business in any geographic area.
All contracts, arrangements, plans, agreements, leases, licenses,
franchises, permits, indentures, authorizations, instruments and other
commitments which are listed on SCHEDULE 3.01(t) pursuant to this Section
3.01(t) are valid and in full force and effect and FED has not, nor, to the best
knowledge of FED, has any other party thereto, breached any provisions of, or
entered into default in any respect under the terms thereof except for such
breaches and defaults
<PAGE>
that would not have a material adverse effect on the FED's business condition.
To FED's knowledge, none of the parties to any of the major contracts identified
in SCHEDULE 3.01(t) have terminated other than pursuant to its terms, or overtly
expressed an intent to materially reduce or terminate the amount of its business
with FED in the future.
(u) INSURANCE AND BANKING FACILITIES. SCHEDULE 3.01(u)
contains a complete and correct list of (i) all contracts of insurance or
indemnity of FED in force at the date of this Agreement (including name of
insurer or indemnitor, agent, annual premium, coverage, deductible amounts, and
expiration date) and (ii) the names and locations of all banks in which FED has
accounts or safe deposit boxes, the designation of each such account and safe
deposit box, and the names of all persons authorized to draw on or have access
to each such account and safe deposit box. All premiums and other payments due
from FED with respect to any such contracts of insurance or indemnity have been
paid, and FED does not know of any fact, act, or failure to act which has or
might cause any such contract to be canceled or terminated. All material known
claims for insurance or indemnity have been presented.
(v) EMPLOYEES. Except for the contracts of employment with
Gary Jones and Susan Jones, FED does not have any written contract of employment
or other employment agreement with any of its employees that is not terminable
at will by FED. FED is not a party to any pending, or to FED's knowledge,
threatened, labor dispute. FED has complied in all material respects with all
applicable federal, state, and local laws, ordinances, rules and regulations and
requirements relating to the employment of labor, including but not limited to
the provisions thereof relating to wages, hours, collective bargaining, payment
of social security, unemployment and withholding taxes, and ensuring equality of
opportunity for employment and advancement of minorities and women. There are no
claims pending, or, to FED's knowledge, threatened to be brought, in any court
or administrative agency by any former or current FED employees for
compensation, pending severance benefits, vacation time, vacation pay or pension
benefits, or any other claim pending from any current or former employee or any
other person arising out of FED's status as employer, whether in the form of
claims for employment discrimination, harassment, unfair labor practices,
grievances, wrongful discharge or otherwise.
(w) EMPLOYEE BENEFIT PLANS. Each employee benefit plan
("PLAN") covering active, former, or retired employees of FED is listed on
SCHEDULE 3.01(W). FED has made available to Parent and Merger-Sub a copy of each
Plan, and where applicable, any related trust agreement, annuity, or insurance
contract. No annual reports (Form 5500) have been required to be filed with the
Internal Revenue Service. To the extent applicable, each Plan complies, in all
material respects, with the requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Code, and any Plan intended
to be qualified under Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified and has remained tax-qualified to
this date and its related trust is tax-exempt and has been so since its
creation. No Plan is covered by Title IV of ERISA or Section 412 of the Code. No
"PROHIBITED TRANSACTION," as defined in ERISA Section 406 or Code Section 4975
has occurred
<PAGE>
with respect to any Plan. Each Plan has been maintained and administered in
material compliance with its terms and with the requirements prescribed by any
and all statutes, orders, rules and regulations, including but not limited to
ERISA and the Code, which are applicable to such Plans. There are no pending or
anticipated claims against or otherwise involving any of the Plans and no suit,
action, or other litigation (excluding claims for benefits incurred in the
ordinary course of Plan activities) has been brought against or with respect to
any Plan. All contributions, reserves, or premium payments to the Plan, accrued
to the date hereof have been made or provided for. FED has not incurred any
liability under Subtitle C or D of Title IV of ERISA with respect to any
"SINGLE-EMPLOYER PLAN," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by FED, or any entity which is considered one
employer with FED under Section 4001 of ERISA. FED has not incurred any
withdrawal liability under Subtitle E of Title IV of ERISA with respect to any
"MULTIEMPLOYER PLAN," within the meaning of Section 4001(a)(3) of ERISA. There
are no restrictions on the rights of FED to amend or terminate any Plan without
incurring any liability thereunder. FED has not engaged in or is a successor or
parent corporation to an entity that has engaged in a transaction described in
ERISA Section 4069. There have been no amendments to, written interpretation of,
or announcement (whether or not written) by FED relating to, or change in
employee participation or coverage under, any Plan. Neither FED nor any of its
ERISA affiliates have any current or projected liability in respect of
post-employment or post-retirement welfare benefits for retired or former
employees of FED other than health care continuation benefits required to be
provided under applicable law. No tax under Section 4980B of the Code has been
incurred in respect of any Plan that is a group health plan, as defined in
Section 5000(b)(1) of the Code. FED has administered the FED Stock Option Plan
and other executive compensation Plans, if any, in a manner which will not
result in a compensation charge against earnings or the loss of deductions for
federal and state income tax purposes.
(x) CERTAIN AGREEMENTS. Except as contemplated by this
Agreement, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby will: (i) result in any
payment by FED (including, without limitation, severance, unemployment
compensation, parachute payment, bonus or otherwise) becoming due to any
director, employee or independent contractor of FED under any Plan, agreement or
otherwise, (ii) materially increase any benefits otherwise payable under any
Plan or agreement, or (iii) result in the acceleration of the time of payment or
vesting of any such benefits.
(y) GUARANTEES AND SURETYSHIPS. FED has no powers of attorney
outstanding (other than those issued in the ordinary course of business with
respect to tax matters), FED has no obligations or liabilities (absolute or
contingent) as guarantor, surety, cosigner, endorser, co-maker, indemnitor, or
otherwise respecting the obligations or liabilities of any person, corporation,
partnership, joint venture, association, organization, or other entity.
(z) ENVIRONMENTAL MATTERS. To the knowledge of FED:
<PAGE>
(i) There has not been a discharge or release on any
real property owned or leased by FED (the "REAL PROPERTY") of
any Hazardous Material (as defined below) in violation of any
federal, state or local statute, regulation, rule or order
applicable to health, safety and the environment, including
without limitation, contamination of soil, groundwater or the
environment, generation, handling, storage, transportation or
disposal of Hazardous Materials or exposure to Hazardous
Materials ("ENVIRONMENTAL LAWS"), except for those that would
not, individually or in the aggregate have a material adverse
effect on FED;
(ii) No Hazardous Material has been used by FED in
the operation of FED's business in amounts that would violate
any Environmental Laws;
(iii) FED has not received from any Governmental or
Regulatory Authority or third party any request for
information, notice of claim, demand letter, or other
notification, notice or information that FED is or may be
potentially subject to or responsible for any investigation or
clean-up or other remediation of Hazardous Material present on
any Real Property;
(iv) There have been no environmental investigations,
studies, audits, tests, reviews, or other analyses, the
purpose of which was to discover, identify, or otherwise
characterize the condition of the soil, groundwater, air, or
presence of asbestos at any of the Real Property sites;
(v) There is no asbestos present in any Real Property
presently owned or operated by FED, and no asbestos has been
removed from any Real Property while such Real Property was
owned or operated by FED; and
(vi) There are no underground storage tanks on, in or
under any of the Real Property and no underground storage
tanks have been closed or removed from any Real Property which
are or have been in the ownership of FED.
"HAZARDOUS MATERIAL" means any substance (i) that is a "hazardous
waste" or "hazardous substance" under any federal, state or local statute,
regulation, rule, or order, (ii) that is toxic, explosive, corrosive, flammable,
infectious, radioactive, or otherwise hazardous and is regulated by any
Governmental or Regulatory Authority, (iii) the presence of which on any of the
Real Property causes or threatens to cause a nuisance on any of the Real
Property or to adjacent properties or poses or threatens to pose a hazard to the
health or safety of persons on or about any of the Real Property, or (iv) the
presence of which on adjacent properties could constitute a trespass by Company
or the then current owner(s) of any of the Real Property.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE
MERGER-SUB.
<PAGE>
Except as set forth in the Disclosure Schedule of Parent
attached hereto (the "PARENT DISCLOSURE SCHEDULE"), Parent and Merger-Sub, on
the date hereof and as of the time of Closing, represent and warrant to FED as
follows in this Section 3.02. For purposes of this Section 3.02, "knowledge,"
"know," or "known" means actual knowledge after due inquiry.
(a) ORGANIZATION AND QUALIFICATION. The Parent and the
Merger-Sub are corporations duly organized, validly existing, and in good
standing under the laws of Nevada and Delaware, respectively, and have full
corporate power and authority to conduct their business as and to the extent now
conducted, and currently proposed to be conducted, and to own, use and lease
their assets and properties. Except for the Parent's ownership of the
Merger-Sub, neither the Parent nor the Merger-Sub directly or indirectly own any
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture, or other business association or entity.
(b) ORGANIZATIONAL DOCUMENTS; CAPITAL STOCK.
(i) Attached hereto as EXHIBITS 3.02(a)-1
and 3.02(a)-2, respectively, are true and complete copies of
the Certificate of Incorporation and By-Laws of the Merger-Sub
as in effect on the date hereof. Attached hereto as EXHIBITS
1.05-1 and 1.05-2, respectively, are true and complete copies
of the Certificate of Incorporation and By-Laws of the Parent
as in effect on the date hereof.
(ii) As of the Closing Date, the authorized capital
stock of the Parent will consist solely of Seventy-six Million Three
Hundred Fifty Thousand (76,350,000) shares of the Parent Common Stock.
As of the Closing Date, the authorized capital stock of the Merger-Sub
will consist solely of one thousand (1,000) shares of the common stock,
par value $0.001 per share, of the Merger-Sub (the "MERGER-SUB COMMON
STOCK"). The shares of the Parent Common Stock issuable to the Former
FED Stockholders pursuant to Article II hereof, will be, when issued in
accordance with this Agreement, duly authorized, validly issued, fully
paid, and nonassessable. The outstanding shares of the Parent Common
Stock are eligible for quotation on the Over-the-Counter Bulletin Board
(the "OTCBB").
(iii) Except as contemplated hereby, there are no
outstanding options, warrants, calls, subscriptions, rights, agreements
or other commitments of any character (contingent or otherwise)
obligating the Parent or the Merger-Sub to issue, sell, repurchase,
redeem, or otherwise acquire any shares of the Parent Common Stock or
the Merger-Sub Common Stock, respectively.
(iv) There are no debt obligations of the Parent or
the Merger-Sub of any nature whatsoever, and as of the Closing Date,
neither the Parent nor the Merger-Sub will have any debt, liabilities,
obligations, or contingent obligations of any nature
<PAGE>
whatsoever.
(c) AUTHORITY RELATIVE TO THIS AGREEMENT. The Parent and the
Merger-Sub have full corporate power and authority to enter into this Agreement
and to perform their respective obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery, and performance of
this Agreement by the Parent and the Merger-Sub and the consummation by the
Parent and the Merger-Sub of the Merger and the transactions contemplated hereby
have been duly and validly approved by the respective Boards of Directors of the
Parent and the Merger-Sub and Parent as the sole stockholder of the Merger-Sub,
and no other corporate proceedings on the part of the Parent or the Merger-Sub
are necessary to authorize the execution, delivery, and performance of this
Agreement by the Parent and the Merger-Sub and the consummation by the Parent
and the Merger-Sub of the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by the Parent and the Merger-Sub,
and constitutes a legal, valid, and binding obligation of the Parent and the
Merger-Sub enforceable against the Parent and the Merger-Sub in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer or similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (whether considered in a proceeding at law or in equity).
(d) NON-CONTRAVENTION; APPROVALS AND CONSENTS.
(i) The execution and delivery of this Agreement by
the Parent and the Merger-Sub does not, and the performance by the
Parent and the Merger-Sub of their obligations hereunder and the
consummation of the transactions contemplated hereby will not, conflict
with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in, or give to
any person any right of payment or reimbursement, termination,
cancellation, modification or acceleration of, or result in the
creation or imposition of any Lien on any of the respective assets or
properties of the Parent or the Merger-Sub under any of the terms,
conditions or provisions of (x) the Certificate of Incorporation or
By-Laws of the Parent, (y) any Laws or Orders of any Governmental or
Regulatory Authority applicable to the Parent or the Merger-Sub or any
of their respective assets or properties, or (z) any Contracts to which
either the Parent or the Merger-Sub is a party or by which either the
Parent or the Merger-Sub or any of their respective assets or
properties are bound, excluding from the foregoing clauses (y) and (z)
conflicts, violations, breaches, defaults, terminations, modifications,
accelerations, and creations and impositions of Liens, which
individually or in the aggregate, could not be reasonably expected to
have a Material Adverse Effect on the Parent or the Merger-Sub or on
their ability to consummate the transactions contemplated by this
Agreement.
<PAGE>
(ii) Except for the filing of the Certificate of
Merger and other appropriate merger documents required by the DGCL with
the Secretary of State of Delaware and appropriate documents with the
relevant authorities of other states in which the Constituent Entities
are qualified to do business, no consent, approval, or action of,
filing with or notice to any Governmental or Regulatory Authority or
other public or private third party is necessary or required under any
of the terms, conditions or provisions of any Law or Order of any
Governmental or Regulatory Authority or any Contract to which the
Parent or the Merger-Sub is a party or by which the Parent or the
Merger-Sub or any of their respective assets or properties is bound for
the execution and delivery of this Agreement by the Parent and the
Merger-Sub, the performance by the Parent and the Merger-Sub of their
respective obligations hereunder or the consummation of the
transactions contemplated hereby, except for such consents, approvals
or actions of, filing with or notices to any Governmental or Regulatory
Authority or other public or private third party the failure of which
to make or obtain could not reasonably be expected to have a Material
Adverse Effect on the Parent, the Merger-Sub or the Surviving
Corporation or on the Parent's and the Merger-Sub's ability to
consummate the transactions contemplated by this Agreement.
(e) FINANCIAL STATEMENTS. The Parent has delivered to FED
true, correct, and complete copies of the following: the audited balance sheets
of the Parent (the "PARENT BALANCE SHEETS") as of December 31, 1997, 1998, and
1999; the audited statement of operations of the Parent (the "PARENT OPERATIONS
STATEMENT") for the years ending December 31, 1997, 1998, and 1999; the audited
statement of changes in stockholders' deficit of the Parent (the "PARENT
STOCKHOLDERS' EQUITY STATEMENT") for the years ending December 31, 1997 1998,
and 1999; the audited statement of cash flows of the Parent (the "PARENT CASH
FLOW STATEMENT") for the years ending December 31, 1997, 1998, and 1999
(together, the "PARENT FINANCIAL STATEMENTS"). The Parent Financial Statements
fairly present the financial condition, assets, liabilities, stockholders equity
and results of operations of the Parent for the periods indicated.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
contemplated hereby, since December 31, 1999, no change, event, or development
or combination of changes or developments (including any worsening of any
condition currently existing) has occurred or is reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect on the Parent or the
Merger-Sub (without regard, however, to changes in conditions generally
applicable to the industries in which the Parent and the Merger-Sub are involved
or general economic conditions).
(g) ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters
reflected or reserved against in the Parent Balance Sheets included in the
Parent Financial Statements or the unaudited Balance Sheet of the Merger-Sub,
neither Parent nor the Merger-Sub had at such date and has not incurred since
that date, any liabilities or obligations (whether absolute, accrued,
contingent, fixed or otherwise, or whether due or to become due) of any nature,
except liabilities
<PAGE>
or obligations which were incurred in connection with this Agreement and the
transactions contemplated hereby or in the ordinary course of business
consistent with past practice.
(h) LEGAL PROCEEDINGS. There are no actions, suits,
arbitrations, or proceedings pending or to the knowledge of the Parent or the
Merger-Sub, threatened against, relating to or affecting, nor to the knowledge
of the Parent or the Merger-Sub, are there any Governmental or Regulatory
Authority investigations or audits pending or threatened against, relating to or
affecting, the Parent or the Merger-Sub or any of their assets and properties
which, individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on the Parent or the Merger-Sub or on the ability of the
Parent or the Merger-Sub to consummate the transactions contemplated by this
Agreement. Neither the Parent nor the Merger-Sub is subject to any judgment,
decree, court order, or writ of any Governmental or Regulatory Authority.
(i) INFORMATION SUPPLIED. Nothing in this Agreement or any
schedule, annex, certificate, document, or statement in writing which has been
supplied by or on behalf of the Parent or the Merger-Sub, in connection with the
transactions contemplated hereby, contains any untrue statement of a material
fact, or omits any statement of a material fact required to be stated or
necessary in order to make the statements contained herein or therein not
misleading. There is no fact known to the Parent or the Merger-Sub which
materially and adversely affects the Parent or the Merger-Sub, which has not
been set forth in this Agreement or in the schedules, exhibits, annexes,
certificates, documents, or statements in writing furnished by the Parent or the
Merger-Sub in connection with the transactions contemplated by this Agreement.
(j) COMPLIANCE WITH LAWS AND ORDERS. The Parent and the
Merger-Sub hold all permits, licenses, variances, exemptions, orders, and
approvals of all Governmental and Regulatory Authorities necessary for the
lawful conduct of its business (the "PERMITS"), except for failures to hold such
permits, licenses, variances, exemptions, orders, and approvals which,
individually or in the aggregate, do not and are not reasonably expected to have
a Material Adverse Effect on the Parent or the Merger-Sub. The Parent and the
Merger-Sub are in compliance with the terms of the Permits, except failures so
to comply which, individually or in the aggregate, do not have and are not
reasonably expected to have a Material Adverse Effect on the Parent or the
Merger-Sub. The Parent and the Merger-Sub are not in violation of, or in default
under, any Law or Order of any Governmental or Regulatory Authority except for
violations which, individually or in the aggregate, do not and are not
reasonably expected to have a Material Adverse Effect on the Parent or the
Merger-Sub.
(k) COMPLIANCE WITH AGREEMENTS; CERTAIN AGREEMENTS. Neither
the Parent nor the Merger-Sub, nor to the knowledge of the Parent or the
Merger-Sub, any other party thereto, is in breach or violation of, or in default
in the performance or observance of any term or provision of and no event has
occurred which, with notice or lapse of time or both, is reasonably expected to
result in a default under, (x) the respective Certificates of Incorporation and
By-Laws of the Parent and the Merger-Sub or (y) any material Contract to which
the Parent
<PAGE>
or the Merger-Sub is a party or by which the Parent or the Merger-Sub or any of
their assets or properties is bound, except in the case of clause (y) for
breaches, violations, and defaults which, individually or in the aggregate, do
not and are not reasonably expected to have a Material Adverse Effect on the
Parent or the Merger-Sub.
(l) EMPLOYEE BENEFIT PLANS. Except for awards under the Stock
Option Plan, neither the Parent nor the Merger-Sub has or contributes to any
pension, profit-sharing, option, other incentive plan, or any other type of
employee benefit plan, or have any obligation to or customary arrangement with
employees for bonuses, incentive compensation, vacations, severance pay, sick
pay, sick leave, insurance, service award, relocation, disability, tuition
refund, or other benefits, whether oral or written.
(m) PATENTS, TRADEMARKS, ET CETERA. Neither the Parent nor
the Merger-Sub has Intellectual Property.
(n) INSURANCE. Neither the Parent nor the Merger-Sub has an
insurance policy.
(o) LABOR MATTERS. Except as contemplated under the Stock
Option Plan, and other than Yiu Joe Cheung, who is the sole officer of the
Parent as of the date hereof, neither the Parent nor the Merger-Sub has any
employees.
(p) TANGIBLE PROPERTY AND ASSETS. The Parent and the
Merger-Sub have no facilities or assets.
(q) BROKERS. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried out by the Parent and the
Merger-Sub and their affiliates directly with FED, without the intervention of
any person on behalf of the Parent or the Merger-Sub and their affiliates in
such manner as to give rise to any valid claim by any person against the Parent,
the Merger-Sub, FED or the Surviving Corporation for a finder's fee, brokerage
commission or similar payment.
(r) TRANSACTIONS WITH AFFILIATES. Neither the Parent nor the
Merger-Sub is a party to any material Contract with any of their affiliates or
any director or officer for the purchase, sale, lease or other disposition of
property or services.
(s) TAX MATTERS.
(i) The Parent and the Merger-Sub have filed all tax
returns required to be filed by applicable law prior to the Closing.
All tax returns were (and, as to tax returns not filed as of the date
hereof, will be) true, complete, and correct and filed on a timely
basis. The Parent and the Merger-Sub (x) have paid all taxes due, or
claimed or asserted in writing by any taxing authority to be due, for
the periods covered by such tax
<PAGE>
returns or (y) have duly and fully provided reserves (in accordance
with GAAP) adequate to reflect all such taxes.
(ii) The Parent and the Merger-Sub have established
(and until the Closing will maintain) on their respective books and
records reserves adequate to reflect all material taxes not yet due and
payable. The Parent and the Merger-Sub have made available to FED
complete, and accurate copies of all work papers associated with the
calculation of the Parent's and the Merger-Sub's respective tax
reserves.
(iii) There are no tax liens upon the assets of the
Parent or the Merger-Sub.
(iv) The Parent and the Merger-Sub have not requested
(and no request has been made on their behalf) any extension of time
within which to file any material tax return.
(v) No income tax returns have been examined by any
taxing authorities for any periods; and no deficiency for any material
taxes has been suggested, proposed, asserted, or assessed against the
Parent or the Merger-Sub that has not been resolved and paid in full.
(vi) No audits or other administrative proceedings or
court proceedings are presently pending with regard to any taxes or tax
returns of the Parent or the Merger-Sub. No written claim has been made
by a taxing authority in a jurisdiction where the Parent or the
Merger-Sub does not file tax returns such that it is or may be subject
to taxation by that jurisdiction.
(vii) To the extent requested by FED, the Parent and
the Merger-Sub have made available to FED (or, in the case of tax
returns to be filed on or before the Closing, will make available)
complete and accurate copies of all tax returns and associated work
papers filed by or on behalf of the Parent or the Merger-Sub for all
taxable years ending on or prior to the Closing.
(viii) No agreements relating to allocating or
sharing of any taxes have been entered into by the Parent or the
Merger-Sub.
(ix) Neither the Parent nor the Merger-Sub has
entered into any transactions that could give rise to an understatement
of federal Income Tax.
(x) Neither the Parent, the Merger-Sub nor any other
person on behalf of the Parent or the Merger-Sub has agreed to or is
required to make any adjustments pursuant to Section 481(a) of the Code
or any similar provision of state, local or foreign
<PAGE>
law by reason of a change in accounting method initiated by the Parent
or the Merger-Sub or has any application pending with any taxing
authority requesting permission for any change in accounting methods
that relate to the business or operations of the Parent or the
Merger-Sub, and neither the Parent nor the Merger-Sub has knowledge
that the IRS has proposed any such adjustment or change in accounting
method.
(xi) Neither the Parent nor the Merger-Sub has been,
or is now, a member of any consolidated, combined, unitary or
affiliated group of corporations for any tax purposes.
(t) ACCURACY OF INFORMATION. The Parent has made with the SEC
all filings required by the Securities Exchange Act of 1934, as amended (all
such filings, including any exhibits to such filings, and any future filings
made thereunder are collectively, the "Exchange Act Filings"). None of the
Exchange Act Filings contain any untrue statement of a material fact or omit to
state any 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 Parent has not been required to make any filings under the
Securities Act of 1933.
IV. COVENANTS.
SECTION 4.01 COVENANTS OF THE PARENT AND THE MERGER-SUB
The Parent and the Merger-Sub covenant and agree as follows:
(a) CERTIFICATE OF INCORPORATION AND BY-LAWS. As of the
Closing Date, the Certificate of Incorporation and By-Laws of the Merger-Sub
shall be substantially in the form of EXHIBITS 3.02(a)-1 and 3.02(a)-2,
respectively.
(b) SHARES AND OPTIONS. Except for the sale of Parent Common
Stock to be issued in the Private Placement as contemplated hereby, until the
earlier of the Effective Time or the Termination of this Agreement pursuant to
Article VI (the "RELEASE TIME") without the prior written consent of FED, no
share of capital stock of the Parent or the Merger-Sub or any option or warrant
for any such share, right to subscribe to or purchase any such share, or
security convertible into or exchangeable for any such share, shall be issued or
sold by the Parent or the Merger-Sub, nor shall the Parent or the Merger-Sub
enter into any agreement or commitment to effect any such issuance or sale.
(c) DIVIDENDS AND PURCHASES OF STOCK. Until the Release Time,
without the prior written consent of FED, no cash or non-cash dividend, or
liquidating or other distribution or stock split shall be authorized, declared,
paid, or effected by the Parent or the Merger-Sub in connection with their
respective outstanding capital stock.
<PAGE>
(d) BORROWING OF MONEY; WORKING CAPITAL. Until the Release
Time, neither the Parent nor the Merger-Sub shall incur indebtedness for
borrowed money. Until the Release Time, neither the Parent nor the Merger-Sub
shall guarantee the borrowing of money by any third party, enter into or modify
any capital or operating lease or enter into any material agreement, which in
any case would by their terms require the payment by the Parent or the
Merger-Sub of more than five thousand dollars ($5,000) by the Parent or the
Merger-Sub in any twelve (12) month period.
(e) ACCESS. Until the Release Time, the Parent and the
Merger-Sub will afford the directors, stockholders, counsel, agents, investment
bankers, accountants, and other representatives of FED reasonable access to the
plants, properties, books, and records of the Parent and the Merger-Sub, will
permit them to make extracts from and copies of such books and records, and will
from time to time furnish FED with such additional financial and operating data
and other information as to the financial condition, results of operations,
businesses, properties, assets, liabilities, or future prospects of the Parent
and the Merger-Sub as FED from time to time may reasonably request.
(f) CONDUCT OF BUSINESS. Except as otherwise contemplated or
permitted hereby, until the Release Time, neither the Parent nor the Merger-Sub
shall take any action that would or is reasonably likely to result in any of the
representations or warranties of the Parent or the Merger-Sub set forth in this
Agreement being untrue at the Closing Date, or in any of the conditions to the
Merger set forth in Article V not being satisfied. Except as otherwise
contemplated or permitted hereby, until the Release Time, the Parent or the
Merger-Sub will conduct their affairs in all respects only in the ordinary
course.
(g) ADVICE OF CHANGES. Until the Release Time, the Parent and
the Merger-Sub will promptly advise FED in a reasonably detailed written notice
of any fact or occurrence or any pending threatened occurrence of which it
obtains knowledge and which (if existing and known at the date of the execution
of this Agreement) would have been required to be set forth or disclosed in or
pursuant to this Agreement, which (if existing or known at any time prior to or
at the Effective Time) would make the performance by any party of a covenant
contained in this Agreement impossible or make such performance materially more
difficult in the absence of such fact or occurrence, or which (if existing or
known at the time of the Effective Time) would cause a condition to any party's
obligations under this Agreement not to be fully satisfied.
(h) PUBLIC STATEMENTS. Before either the Parent or the
Merger-Sub releases any information concerning this Agreement, the Merger, or
any other transactions contemplated by this Agreement which is intended for or
is reasonably expected to result in public dissemination thereof, the Parent and
the Merger-Sub shall cooperate with FED, shall furnish drafts of all documents
or proposed oral statements to FED for comments, and shall not release any such
information without the prior consent of FED; PROVIDED, HOWEVER, that the
foregoing shall not be deemed to prevent the Parent or the Merger-Sub from
releasing any information or making
<PAGE>
any disclosure to the extent that the Parent or the Merger-Sub reasonably
determines that it is required to do so by law.
(i) OTHER PROPOSALS. Until the Release Time the Parent shall
not authorize or permit any officer, director, employee, counsel, agent,
investment banker, accountant, or other representative of the Parent, directly
or indirectly, to: (i) initiate contact with any person or entity in an effort
to solicit any Takeover Proposal (as such term is defined in this Section
4.01(i)); (ii) cooperate with, or furnish or cause to be furnished any
non-public information concerning the financial condition, results of
operations, businesses, properties, assets, liabilities, or future prospects of
the Parent to, any person or entity in connection with any Takeover Proposal;
(iii) negotiate with any person or entity with respect to any Takeover Proposal;
or (iv) enter into any agreement or understanding with the intent to effect a
Takeover Proposal; PROVIDED, HOWEVER, that the Parent shall be entitled to take
any action described in the foregoing clauses (ii)-(iv) if and to the extent
that the Board of Directors of the Parent determines in good faith, based on the
advice of their respective counsel, that the failure to take any such action
would violate their fiduciary duties to the stockholders of the Parent. The
Parent will immediately give written notice to FED of the details of any
Takeover Proposal of which the Parent becomes aware. As used in Section 4.01(i),
"Takeover Proposal" shall mean any proposal, other than as contemplated by this
Agreement, for a merger, consolidation, reorganization, other business
combination, or recapitalization involving the Parent, for the acquisition of a
ten percent (10%) or greater interest in the equity or in any class or series of
capital stock of the Parent, for the acquisition of the right to cast ten
percent (10%) or more of the votes on any matter with respect to the Parent, or
for the acquisition of one of their divisions or of a substantial portion of any
of their respective assets, the effect of which may be to prohibit, restrict, or
delay the consummation of the Merger or any of the other transactions
contemplated by this Agreement, or impair the contemplated benefits to FED of
the Merger or any of the other transactions contemplated by this Agreement.
(j) CONSENTS WITHOUT ANY CONDITION. Neither the Parent nor the
Merger-Sub shall make any agreement or reach any understanding, not approved in
writing by FED, as a condition for obtaining any consent, authorization,
approval, order, license, certificate, or permit required for the consummation
of the transactions contemplated by this Agreement.
(k) SEC FILINGS. The Parent shall use reasonable efforts to
prepare and file in a timely manner any Exchange Act Filings required to be made
prior to or after the Closing Date. If at any time prior to the Closing Date the
Parent finds that any Exchange Act Filing contained an untrue statement of a
material fact or omitted to state any 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 Parent shall, upon
becoming aware of any such untrue statement or omission, promptly notify FED.
(l) REGISTRATION. Subject to the completion of an audit and
the preparation and delivery of audited financial statements, the Parent shall
file, within ninety (90) days after the
<PAGE>
Closing, a registration statement on Form SB-2 (the "REGISTRATION STATEMENT")
with the SEC relating to any Parent Common Stock issued in the Private
Placement; PROVIDED, HOWEVER, that the Former FED Stockholders or affiliates
thereof shall not sell or otherwise transfer any ownership interest in their
stock, options or other indicia of equity ownership in the Parent (including any
short sale, pledge or other similar transaction) for a period of eighteen (18)
months following the Closing Date (the "INITIAL TERMINATION DATE") and, for the
six (6) months after the Initial Termination Date, each such shareholder may
transfer no more than twenty percent (20%) of their stock in the Parent,
pursuant to a Lock-Up Agreement (the "LOCK-UP AGREEMENT") substantially in the
form attached hereto as EXHIBIT 4.01(l).
(m) CONSULTING AGREEMENT. At or prior to the Closing, the
Parent shall enter into a consulting agreement (the "CONSULTING AGREEMENT") with
Verus International Ltd. ("VERUS") for a two (2) year term, which shall provide
that Verus shall receive fifteen thousand dollars ($15,000.00) per month for
consulting services it renders to the Parent. The form of the Consulting
Agreement is attached hereto as EXHIBIT 4.01(m).
(n) BOARD OF DIRECTORS OF THE PARENT. The initial Board of
Directors (the "BOARD") of the Parent shall consist of seven (7) persons: two
(2) persons selected by Citigroup/Travelers Insurance Company or an affiliate or
designee thereof ("CITIGROUP") (one of whom shall be Jack Rivkin), three (3)
persons selected by Verus (one of whom shall be Ajmal Khan), and two (2) members
of the management of the Parent (one of whom shall be Gary W. Jones), and shall
serve until the next annual meeting of the shareholders. The Bylaws of the
Parent shall provide that a valid quorum of the Board shall consist of five (5)
directors, one of whom shall be the Chairman of the Board. The Bylaws shall also
provide for the establishment of an Executive Committee of the Board that will
consist of Gary Jones, Jack Rivkin and Ajmal Khan, and a Compensation Committee
that shall be comprised of two (2) independent directors according to the
requirements of the American Stock Exchange. Following the Merger, Susan Jones
shall remain as Secretary of Parent and Parent shall continue to honor the
observer rights of certain Former FED Stockholders for regular meetings of the
Board.
(o) TRANSFER TAXES. The Parent and the Merger-Sub shall
timely prepare and file any declaration or filing necessary to comply with any
transfer tax statutes that require any such filing before the Effective Time.
SECTION 4.02 COVENANTS OF FED
FED covenants and agrees as follows:
(a) CERTIFICATE OF INCORPORATION AND BY-LAWS. As of the
Closing Date, the Certificate of Incorporation and By-Laws of FED shall be
substantially in the form of EXHIBITS 1.04-1 and 1.04-2, respectively.
<PAGE>
(b) SHARES AND OPTIONS. Except as contemplated hereby, until
the earlier of the Effective Time or the Release Time, without the prior written
consent of Parent, no share of capital stock of FED or any option or warrant for
any such share, right to subscribe to or purchase any such share, or security
convertible into or exchangeable for any such share, shall be issued or sold by
FED, nor shall FED enter into any agreement or commitment to effect any such
issuance or sale.
(c) DIVIDENDS AND PURCHASES OF STOCK. Until the Release Time,
without the prior written consent of Parent, no cash or non-cash dividend, or
liquidating or other distribution or stock split shall be authorized, declared,
paid, or effected by the FED or in connection with their respective outstanding
capital stock.
(d) BORROWING OF MONEY; WORKING CAPITAL. Except for certain
bridge loans from the Parent or pursuant to the Funding Agreement dated December
9, 1999, until the Release Time, FED shall not incur indebtedness for borrowed
money. Until the Release Time, FED shall not guarantee the borrowing of money by
any third party, enter into or modify any capital or operating lease or enter
into any material agreement, which in any case would by their terms require the
payment by FED of more than five thousand dollars ($5,000) by FED in any twelve
(12) month period.
(e) ACCESS. Until the Release Time, FED will afford the
directors, stockholders, counsel, agents, investment bankers, accountants, and
other representatives of the Parent and Merger-Sub reasonable access to the
plants, properties, books, and records of FED, will permit them to make extracts
from and copies of such books and records, and will from time to time furnish
the Parent and Merger-Sub with such additional financial and operating data and
other information as to the financial condition, results of operations,
businesses, properties, assets, liabilities, or future prospects of FED as the
Parent and Merger-Sub from time to time may reasonably request.
(f) CONDUCT OF BUSINESS. Until the Release Time, FED shall
not take any action that would or is reasonably likely to result in any of the
representations or warranties of FED set forth in this Agreement being untrue at
the Closing Date or to any of the conditions to the Merger set forth in Article
V not being satisfied. Until the Release Time, FED will use all reasonable
efforts to preserve the business operations of FED intact, to keep available the
services of its present personnel, and to preserve the good will of its
suppliers, customers, and others having business relations with any of them.
(g) ADVICE OF CHANGES. Until the Release Time, FED will
promptly advise the Parent in a reasonably detailed written notice of any fact
or occurrence or any pending threatened occurrence of which it obtains knowledge
and which (if existing or known at the date of the execution of this Agreement)
would have been required to be set forth or disclosed in or pursuant to this
Agreement, which (if existing and known at any time prior to or at the Effective
Time)
<PAGE>
would make the performance by any party of a covenant contained in this
Agreement impossible or make such performance materially more difficult than in
the absence of such fact or occurrence, or which (if existing and known at the
time of the Effective Time) would cause a condition to any party's obligations
under this Agreement not to be fully satisfied.
(h) PUBLIC STATEMENTS. Before FED releases any information
concerning this Agreement, the Merger, or any of the other transactions
contemplated by this Agreement which is intended for, or is reasonably expected
to, result in public dissemination thereof, FED shall cooperate with the Parent,
shall furnish drafts of all documents or proposed oral statements to the Parent
for comments, and shall not release any such information without the prior
consent of the Parent; PROVIDED, HOWEVER, that the foregoing shall not be deemed
to prevent FED from releasing any information or making any disclosure to the
extent FED reasonably determines that it is required to do so by law.
(i) OTHER PROPOSALS. Until the Release Time, FED shall not
authorize or permit any officer, director, employee, counsel, agent, investment
banker, accountant, or other representative of FED, directly or indirectly, to
(i) initiate contact with any person or entity in an effort to solicit any
Takeover Proposal (as such term is defined in this Section 4.02(d)); (ii)
cooperate with, or furnish or cause to be furnished any non-public information
concerning the financial condition, results of operations, businesses,
properties, assets, liabilities, or future prospects of FED to, any person or
entity in connection with any Takeover Proposal; (iii) negotiate with any person
or entity with respect to any Takeover Proposal; or (iv) enter into any
agreement or understanding with the intent to effect a Takeover Proposal;
PROVIDED, HOWEVER, that FED shall be entitled to take any action described in
the foregoing clauses (ii)-(iv) if and to the extent that the Board of Directors
of FED determines in good faith, based on the advice of their counsel, that the
failure to take any such action would violate their fiduciary duties to the
stockholders of FED. FED will immediately give written notice to the Parent of
the details of any Takeover Proposal of which FED becomes aware. As used in
Section 4.02(d), "Takeover Proposal" shall mean any proposal, other than as
contemplated by this Agreement, for a merger, consolidation, reorganization,
other business combination, or recapitalization involving FED, for the
acquisition of a ten percent (10%) or greater interest in the equity or in any
class or series of capital stock of FED, for the acquisition of the right to
cast ten percent (10%) or more of the votes on any matter with respect to FED,
or for the acquisition of one of their divisions or of a substantial portion of
any of their respective assets, the effect of which may be to prohibit,
restrict, or delay the consummation of the Merger or any of the other
transactions contemplated by this Agreement, or impair the contemplated benefits
to the Parent of the Merger or any of the other transactions contemplated by
this Agreement.
(j) APPROVAL OF STOCKHOLDERS. FED shall, through its Board of
Directors, duly call, give notice of, convene, and hold a meeting of its
stockholders for the purpose of voting on the ratification and approval of this
Merger Agreement, or use its best efforts to obtain the consent of its
stockholders, as soon as reasonably practicable following the date hereof.
<PAGE>
(k) LOCK-UP AGREEMENTS. FED shall use its best efforts to
obtain an executed Lock-Up Agreement from each Former FED Stockholder.
SECTION 4.03 DIRECTORS' AND OFFICERS' INSURANCE
(a) The Parent shall at its expense, until the third (3rd)
anniversary of the Effective Time, cause to be maintained in effect, to the
extent available, policies of directors' and officers' liability insurance in a
face amount of not less than ten million dollars ($10,000,000).
(b) The provisions of this Section 4.03 are intended to be for
the benefit of, and shall be enforceable by, each party entitled to insurance
coverage under Section 4.03(a) above, and his or her heirs and legal
representatives, and shall be in addition to any other rights a director or
officer may have under the Certificate of Incorporation or By-Laws of the Parent
or under the DGCL or otherwise.
(c) In the event the Parent or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, in each such case, proper provision shall be made so that
the successors and assigns of the Parent, as the case may be, shall assume the
obligations set forth in this Section 4.03.
SECTION 4.04 AMEX LISTING
The Parent shall use its best efforts to cause the shares of
the Parent Common Stock, after such Parent Common Stock is registered or freely
tradeable, to be admitted for trading or authorized for quotation on the
American Stock Exchange ("AMEX"), subject to official notice of issuance, prior
to the Effective Time. Parent covenants and agrees to use counsel selected by
Verus as lead securities counsel for all stock exchange listings and SEC and
state securities law filings following the Merger.
V. CONDITIONS.
SECTION 5.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER
The respective obligations of each party to effect the Merger
are subject to the fulfillment, at or prior to the Closing, of each of the
following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger
shall have been adopted by the requisite vote of the stockholders of FED and
Merger-Sub.
<PAGE>
(b) STATE SECURITIES LAWS. The Parent shall have received all
state securities or "Blue Sky" permits and other authorizations necessary to
issue the Parent Common Stock pursuant to the Merger.
(c) NO INJUNCTIONS OR RESTRAINTS. No court of competent
jurisdiction or other competent Governmental or Regulatory Authority shall have
enacted, issued, promulgated, enforced, or entered any Law or Order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of making illegal or otherwise restricting, preventing, or prohibiting
consummation of the Merger or the other transactions contemplated by this
Agreement.
(d) CONSENTS AND APPROVALS. Other than the filings provided
for by Section 1.02, all consents, approvals and actions of, filings with and
notices to any Governmental or Regulatory Authority or any other public or
private third parties required of the Parent, the Merger-Sub or FED to
consummate the Merger shall have been obtained, all in form and substance
reasonably satisfactory to the Parent, the Merger-Sub and FED, and no such
consent, approval, or action shall contain any term or condition which could be
reasonably expected to result in a material diminution of the benefits of the
Merger to the stockholders of the Parent, the Merger-Sub and FED.
SECTION 5.02 CONDITIONS TO OBLIGATIONS OF THE PARENT AND THE
MERGER-SUB
The obligations of the Parent and the Merger-Sub to effect the
Merger is further subject to the fulfillment, at or prior to the Closing, of
each of the following additional conditions (all or any of which may be waived
in whole or in part by the Parent and the Merger-Sub and in their sole
discretion):
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by FED in this Agreement shall be true and correct in all
material respects as of the Closing Date as though made on and as of the Closing
Date or, in the case of representations and warranties made as of a specified
date earlier than the Closing Date, on and as of such earlier date, and FED
shall have delivered to the Parent and Merger-Sub a certificate, dated the
Closing Date and executed on behalf of FED by a duly authorized officer, to such
effect.
(b) PERFORMANCE OF OBLIGATIONS. FED shall have performed and
complied with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by FED at or
prior to the Closing, and FED shall have delivered to the Parent and Merger-Sub
a certificate dated the Closing Date and executed on behalf of FED by a duly
authorized officer, to such effect.
(c) OTHER CLOSING DOCUMENTS. FED shall have delivered to
the Parent and the Merger-Sub at or prior to the Closing Date such other
documents as the Parent and the Merger-
<PAGE>
Sub may reasonably request in order to enable the Parent and the
Merger-Sub to determine whether the conditions to their obligations under this
Agreement have been met and otherwise to carry out the provisions of this
Agreement.
(d) REVIEW OF PROCEEDINGS. All actions, proceedings,
instruments, and documents required by the Parent and the Merger-Sub to carry
out this Agreement or incidental thereto and all other related legal matters
shall be subject to the reasonable approval of Preston Gates & Ellis LLP,
counsel to the Parent and the Merger-Sub, and FED shall have furnished such
documents as such counsel may have reasonably requested for the purpose of
enabling it to pass upon such matters.
(e) LEGAL OPINION. The Parent and the Merger-Sub shall receive
at the Closing Date an opinion of Ehrenreich Eilenberg & Krause LLP (the "EEK
OPINION"), counsel for FED, addressed to the Parent and the Merger-Sub, in
substantially the form attached hereto as EXHIBIT 5.02(e).
(f) LEGAL ACTION. There shall not have been instituted or
threatened any legal proceeding relating to, or seeking to prohibit, or
otherwise challenge the consummation of, the transactions contemplated by this
Agreement, or to obtain substantial damages with respect thereto.
(g) LOCK-UP AGREEMENTS. Former FED Stockholders holding an
aggregate of Ninety-five percent (95%) of the shares of FED Common Stock shall
have executed and delivered to the Parent a Lock-Up Agreement.
(h) EMPLOYMENT AGREEMENTS. Gary Jones and Susan Jones shall
have executed employment agreements with the Parent, substantially in the forms
attached hereto as EXHIBITS 5.02-1 and 5.02-2.
SECTION 5.03 CONDITIONS TO OBLIGATION OF FED TO EFFECT THE MERGER
The obligation of FED to effect the Merger is further subject
to the fulfillment, at or prior to the Closing, of each of the following
additional conditions (all or any of which may be waived in whole or in part by
FED in its sole discretion):
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Parent and the Merger-Sub in this Agreement shall be true
and correct in all material respects as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and warranties
made as of a specified date earlier than the Closing Date, on and as of such
earlier date, and the Parent and the Merger-Sub shall have delivered to FED a
certificate, dated the Closing Date and executed on behalf of the Parent and the
Merger-Sub by a duly authorized officer, to such effect.
<PAGE>
(b) PERFORMANCE OF OBLIGATIONS. The Parent and the Merger-Sub
shall have performed and complied with in all material respects, each agreement,
covenant, and obligation required by this Agreement to be so performed or
complied with by the Parent and the Merger-Sub at or prior to the Closing, and
the Parent and the Merger-Sub shall have delivered to FED a certificate, dated
the Closing Date and executed on behalf of the Parent and the Merger-Sub by a
duly authorized officer, to such effect.
(c) OTHER CLOSING DOCUMENTS. The Parent and the Merger-Sub
shall have delivered to FED at or prior to the Effective Time such other
documents as FED may reasonably request in order to enable FED to determine
whether the conditions to its obligations under this Agreement have been met and
otherwise to carry out the provisions of this Agreement.
(d) REVIEW OF PROCEEDINGS. All actions, proceedings,
instruments, and documents required by FED to carry out this Agreement or
incidental thereto and all other related legal matters shall be subject to the
reasonable approval of Ehrenreich Eilenberg & Krause LLP, counsel to FED, and
the Parent and the Merger-Sub shall have furnished such documents as such
counsel may have reasonably requested for the purpose of enabling it to pass
upon such matters.
(e) LEGAL OPINION. FED shall receive at the Closing Date an
opinion of Preston Gates & Ellis LLP (the "PGE OPINION"), counsel for the Parent
and the Merger-Sub, addressed to FED, in substantially the form attached hereto
as EXHIBIT 5.03(e).
(f) SECURITIES ACT COMPLIANCE. The issuance of the Parent
Common Stock to the FED Stockholders shall qualify as a private placement under
Regulation D of the Securities Act of 1933 and shall be exempt from registration
under the federal securities laws and all state and other securities laws.
(g) LEGAL ACTION. There shall not have been instituted or
threatened any legal proceeding relating to, or seeking to prohibit or otherwise
challenge the consummation of, the transactions contemplated by this Agreement,
or to obtain substantial damages with respect thereto.
(h) FORM S-8 FILING. The Parent shall have adopted the Stock
Option Plan and shall have filed a registration statement on Form S-8 with the
SEC to register the issuance and sale of Parent Common Stock upon exercise of
options granted under the Stock Option Plan.
VI. TERMINATION.
SECTION 6.01 TERMINATION
<PAGE>
This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether prior to or after the FED stockholders' approval:
(a) By mutual written agreement of FED and Parent duly
authorized by action taken by or on behalf of their respective Boards of
Directors.
(b) By either FED or the Parent upon written notification to
the other party, if:
(i) the FED stockholders' approval shall not be
obtained by reason of the failure to obtain the requisite vote upon a
vote held at a meeting of such stockholders or pursuant to a written
consent; or
(ii) facts exist which render impossible the
satisfaction of one or more of the conditions set forth in Section 5.01
and such are not waived by the Parent and FED.
(c) By the Parent upon written notification to FED, if:
(i) there has been a material breach of any
representation, warranty, covenant, or agreement on the part of FED set
forth in this Agreement which breach has not been cured within ten (10)
business days following receipt by FED of notice of such breach from
the Parent or the Merger-Sub or assurance of such cure reasonably
satisfactory to the Parent or the Merger-Sub have not been given by or
on behalf of FED within such ten (10) business day period; or
(ii) facts exist which render impossible the
satisfaction of one or more of the conditions set forth in Section 5.02
and such are not waived by the Parent; or
(iii) the Parent or its stockholders receive a
proposal or offer for any Takeover Proposal, other than pursuant to the
transactions contemplated by this Agreement, in connection with which
the Board of Directors of the Parent exercises any of its rights
specified in Section 4.01(i).
(d) By FED upon written notification to the Parent, if:
(i) at any time after July 15, 2000 if the Merger
shall not have been consummated on or prior to such date and such
failure to consummate the Merger is not caused by a breach of this
Agreement by FED; or
(ii) there has been a material breach of any
representation, warranty, covenant, or agreement on the part of the
Parent or the Merger-Sub set forth in this
<PAGE>
Agreement which breach has not been cured with ten (10) business days
following receipt by the Parent of notice of such breach from FED or
assurance of such cure reasonably satisfactory to FED shall not have
been given by or on behalf of the Parent or the Merger-Sub within such
ten (10) business day period; or
(iii) facts exist which render impossible the
satisfaction of one or more of the conditions set forth in Section 5.03
and such are not waived by FED.
SECTION 6.02 BREAK-UP FEE.
If this Agreement is terminated pursuant to either Section
6.01(b)(i) or 6.01(c)(i) above, then FED shall (i) at the election of Parent,
either (A) pay Parent $1,375,000 in cash or (B) issue to Parent shares of FED
Capital Stock representing 5% of the outstanding FED Capital Stock on a fully
diluted basis (i.e., assuming exercise or conversion of all outstanding FED
Convertible Securities) and after giving effect to the issuance of such shares
to Parent, or (C) perform any combination of (A) and (B), and (ii) repay the
Notes in full (unless otherwise converted into FED equity at the election of the
holder) and reimburse Parent for its legal fees and associated expenses
reasonably incurred in connection with the Merger in an amount not to exceed
$100,000.
VII. INDEMNIFICATION.
SECTION 7.01 INDEMNIFICATION BY THE PARENT
(a) The Parent agrees to indemnify and hold harmless FED and
its directors, officers, employees, counsel, and agents against and in respect
of any and all claims as and when incurred, arising out of or based upon any
breach or inaccuracy of any representation, warranty, covenant, or agreement of
the Parent or the Merger-Sub contained in this Agreement (including the Exhibits
and Schedules attached hereto) or any certificates delivered pursuant to this
Agreement.
(b) Each indemnified party pursuant to Section 7.01(a) (a "FED
INDEMNITEE") shall give the Parent prompt notice of any claim asserted or
threatened against such FED Indemnitee on the basis of which such FED Indemnitee
intends to seek indemnification (but the obligations of the Parent shall not be
conditioned upon receipt of such notice, except to the extent that the Parent is
actually prejudiced by such failure to give notice). If the claim is a third
party claim, demand, action, or proceeding, the Parent promptly shall assume the
defense of any FED Indemnitee, with counsel reasonably satisfactory to such FED
Indemnitee, and the fees and expenses of such counsel shall be the sole cost and
expense of the Parent. Notwithstanding the foregoing, any FED Indemnitee shall
be entitled, at his or its expense, to employ counsel separate from counsel for
the Parent and from any other party in such action, proceeding, or
investigation. No FED Indemnitee may agree to a settlement of claim without the
prior written approval of
<PAGE>
the Parent which approval shall not be unreasonably withheld. The Parent may not
agree to a settlement of a claim involving anything other than the payment of
money without the prior written approval of the FED Indemnitee which shall not
be unreasonably withheld.
SECTION 7.02 INDEMNIFICATION BY FED
(a) FED agrees to indemnify and hold harmless the Parent,
Merger-Sub and each of their respective officers, directors, counsel, and agents
against and in respect of any and all claims as and when incurred, arising out
of or based upon any breach or inaccuracy of any representation, warranty,
covenant, or agreement of FED contained in this Agreement (including the
Exhibits and Schedules attached hereto) or any certificates delivered pursuant
to this Agreement.
(b) Each indemnified party pursuant to Section 7.02(a) (an
"INDEMNITEE") shall give FED prompt notice of any claim asserted or threatened
against such Indemnitee on the basis of which such Indemnitee intends to seek
indemnification (but the obligations of FED shall not be conditioned upon
receipt of such notice, except to the extent that FED is actually prejudiced by
such failure to give notice). If the claim is a third party claim, demand,
action, or proceeding, FED promptly shall assume the defense of any Indemnitee,
with counsel reasonably satisfactory to such Indemnitee, and the fees and
expenses of such counsel shall be the sole cost and expense of FED.
Notwithstanding the foregoing, any Indemnitee shall be entitled, at his or their
expense, to employ counsel separate from counsel for FED and from any other
party in such action, proceeding, or investigation. No Indemnitee may agree to a
settlement of claim without the prior written approval of FED which approval
shall not be unreasonably withheld. FED may not agree to a settlement of a claim
involving anything other than the payment of money without the prior written
approval of the Indemnitee which shall not be unreasonably withheld.
VIII. MISCELLANEOUS.
SECTION 8.01 FURTHER ACTIONS
Each party hereto will execute such further documents and
instruments and take such further actions as may reasonably be requested by the
other party to consummate the Merger, to vest the Surviving Corporation with
full title to all assets, properties, rights, approvals, immunities, and
franchises of either of the Constituent Entities or to effect the other purposes
of this Agreement.
SECTION 8.02 AVAILABILITY OF EQUITABLE REMEDIES
Since a breach of the provisions of this Agreement could not
adequately be compensated by money damages, any party shall be entitled, either
before or after the Effective Time, in addition to any other right or remedy
available to it, to an injunction restraining such
<PAGE>
breach or threatened breach and to specific performance of any such provision of
this Agreement, and, in either case, no bond or other security shall be required
in connection therewith, and the parties hereby consent to the issuance of such
an injunction and to the ordering of specific performance.
SECTION 8.03 SURVIVAL
The representations, warranties, covenants, and agreements
contained in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Merger for a period of eighteen (18) months after
the Effective Time.
SECTION 8.04 MODIFICATION
This Agreement may be amended, supplemented, or modified by
action taken by or on behalf of the respective Boards of Directors of the
parties hereto at any time prior to the Effective Time. No such amendment,
supplement, or modification shall be effective unless set forth in a written
instrument duly executed by or on behalf of each party hereto.
SECTION 8.05 NOTICES
Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested or by Federal Express, express mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
which it is to be given at the address of such party set forth in the preamble
to this Agreement (or to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 8.05) with copies
(which copies shall not constitute notice) as follows:
If to the Parent or the Merger-Sub: 1177 West Hastings Street, Suite 2000
Vancouver, British Columbia V6E2K3
Attn: Mr. Ajmal Khan
With a copy to: Preston Gates & Ellis LLP
701 Fifth Avenue, Suite 5000
Seattle, Washington 98104-7078
Attn: Gary J. Kocher, Esq.
If to FED: 1580 Route 52
Hopewell Junction, New York 12633
Attn: Mr. Gary W. Jones
With a copy to: Ehrenreich Eilenberg & Krause
<PAGE>
LLP
11 East 44th Street, 17th Floor
New York, New York 10017
Attn: Adam D. Eilenberg, Esq.
Any notice shall be addressed to the attention of the Chief Executive
Officer. Any notice or other communication given by certified mail shall be
deemed given three business days after certification thereof, except for a
notice changing a party's address which will be deemed given at the time of
receipt thereof. Any notice given by other means permitted by this Section 8.05
shall be deemed given at the time of receipt hereof.
SECTION 8.06 WAIVER
Any waiver by any party of a breach of any term of this
Agreement shall not operate as or be construed to be a waiver of any other
breach of that term or of any breach of any other term of this Agreement. The
failure of a party to insist upon strict adherence to any term of this Agreement
on one or more occasions will not be considered a waiver or deprive that party
of the right thereafter to insist upon strict adherence to that term or any
other term of this Agreement. Any waiver must be in writing and be authorized by
a resolution of the Board of Directors or by an officer of the waiving party.
SECTION 8.07 BINDING EFFECT
The provisions of this Agreement shall be binding upon and
inure to the benefit of the Parent, the Merger-Sub, and FED, and their
respective successors and assigns.
SECTION 8.08 NO THIRD-PARTY BENEFICIARIES
This Agreement does not create, and shall not be construed as
creating, any rights enforceable by any person not a party to this Agreement,
except as referred to in Sections 4.03, 7.01 and 7.02.
SECTION 8.09 SEVERABILITY.
If any provision of this Agreement is hereafter held to be
invalid, illegal, or unenforceable for any reason, such provision shall be
reformed to the maximum extent permitted so as to preserve the parties' original
intent, failing which, it shall be severed from this Agreement, with the balance
of this Agreement continuing in full force and effect. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable. If any provision is inapplicable to any
person or circumstance, it shall nevertheless remain applicable to all other
persons and circumstances.
<PAGE>
SECTION 8.10 MERGER; ASSIGNABILITY
This Agreement and the other agreements to be delivered
pursuant to this Agreement, and Exhibits attached hereto set forth the entire
understanding of the parties with respect to the subject matter hereof and
supersede all existing agreements concerning such subject matter. This Agreement
may not be assigned by any party without the prior written consent of each other
party to their Agreement.
SECTION 8.11 HEADINGS
The headings in this Agreement are solely for convenience of
reference and shall be given no effect in the construction or interpretation of
this Agreement.
SECTION 8.12 COUNTERPARTS; GOVERNING LAW; JURISDICTION
This Agreement may be executed in any number of counterparts
(and by facsimile), each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
giving effect to the rules governing the conflict of laws. Any action, suit, or
proceeding arising out of, based on, or in connection with this Agreement, the
Merger, or the other transactions contemplated hereby, or any document relating
hereto or delivered in connection with the transactions contemplated hereby, may
be brought only and exclusively in the Federal or State Courts located in the
State of Delaware; and each party covenants and agrees not to assert, by way of
motion, as a defense or otherwise, in any such action, suit or proceeding, any
claim that it is not subject personally to the jurisdiction of such court if it
has been duly served with process, that its property is exempt or immune from
attachment or execution, that the action, suit, or proceeding is brought in an
inconvenient forum, that the venue of the action, suit, or proceeding is
improper, or that this Agreement or the subject matter hereof may not be
enforced in or by such court.
[The remainder of this page is intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by duly
authorized officers of each of the parties hereto as of the date first above
written.
FED CORPORATION
By: /s/ Gary W. Jones
------------------------------------------
Name: Gary W. Jones
Title: President/Chief Executive Officer
FASHION DYNAMICS CORP.
By: /s/ Yiu Joe Cheung
------------------------------------------
Name: Yiu Joe Cheung
Title: President
FED CAPITAL ACQUISTION CORPORATION
By: /s/ Yiu Joe Cheung
------------------------------------------
Name: Yiu Joe Cheung
Title: President
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF
AMENDMENT OF
ARTICLES OF INCORPORATION
OF
FASHION DYNAMICS CORP.
(AFTER PAYMENT OF CAPITAL AND ISSUANCE OF STOCK)
I THE UNDERSIGNED, sole Officer of FASHION DYNAMICS CORP. (the
"Corporation") hereby certify that, pursuant to the provisions of the Nevada
Revised Statutes, the following resolutions to amend its articles of
incorporation were duly adopted:
1. (a) The Board of Directors of the Corporation, acting pursuant to a
unanimous written consent on February 18, 2000 resolved to amend the
Articles of Incorporation as originally filed and/or amended, as
follows:
"RESOLVED FURTHER, that the Board approved and recommend to
the shareholders for approval the amendment to the Company's
Articles of Incorporation ("Articles") as described in the
Proxy Statement to be distributed to shareholders on February
19, 2000, copies of which were distributed to each of the
members of the Board prior to the meeting (the "Proxy
Statement");
RESOLVED FURTHER, that a special meeting of the shareholders
of the Company be held at 10:00 A.M. on February 29, 2000 at
the offices of Preston Gates & Ellis LLP for the purpose of
approving the change in the Company's name to eMagin
Corporation and approving the Board's adoption of the
Company's 2000 Stock Option Plan;
RESOLVED FURTHER, that the Secretary of the Company is
authorized to cause a notice and the Proxy Statement to be
served upon all shareholders of record of the Company as of
the record date, which date shall be February 18, 2000;
RESOLVED FURTHER, that Peter Lee and Yiu Joe Cheung shall be
authorized to serve as proxies for the Company's shareholders;
RESOLVED FURTHER, that upon shareholder approval, on the
Effective Date, Section 1 of the Articles of Incorporation
shall be amended to read:
1. The name of the corporation is:
<PAGE>
eMagin Corporation
(b) A majority of the stockholders holding 58% of the common shares
outstanding of Fashion Dynamics Corp. voted, by person or proxy, at a
special meeting duly held at 10:00 A.M. on February 29, 2000 for the
purpose of approving the change in the Company's name to eMagin
Corporation, approved the following amendment to the Company's Articles
of Incorporation:
1. The name of the corporation is:
eMagin Corporation
2. The Board of Directors of the Corporation, acting pursuant to a unanimous
written consent on December 31, 1999 resolved to adopt the following resolution:
"Resolved, that the sole Director is authorized to forward split the
currently issued and outstanding stock of the corporation on a 3.054:1
basis. In lieu of fractional shares, the corporation shall round all
split shares to the nearest whole share. As a result of this split, the
currently issued and outstanding stock of the corporation change from
6,600,000 to approximately 20,156,400 common shares."
The Board of Directors of the Corporation, acting pursuant to a
unanimous written consent on December 31, 1999 resolved to adopt the following
resolution:
"RESOLVED FURTHER, that a forward split of the currently authorized
capital stock of the Company on a 3.054:1 basis shall be effected,
reflecting the previous split of the issued and outstanding capital
stock by the Board of Directors on December 31, 1999. As a result of
the split, the currently authorized capital stock of the Company shall
change from 25,000,000 to 76,350,000 common shares. The officers of the
Company are hereby directed to file documentation with the Secretary of
State of the State of Nevada to effect such split;"
Pursuant to NRS 78.207 and 78.209 and the resolution of the Board above
approving the increase in the number of the authorized shares of the
Corporation, the following information is provided to satisfy the requirements
of NRS 78.209:
(a) The current number of authorized shares of the Corporation is
25,000,000 shares of common stock, $0.001 par value;
(b) The number of authorized shares of the Corporation after the change
is 76,350,000 shares of common stock, $0.001 par value;
<PAGE>
(c) After the change, 3.054:1 shares of common stock will be issued for
every one share of common stock held by each stockholder of common stock before
the increase;
(d) In lieu of fractional shares, all split shares shall be rounded to
the nearest whole share;
(e) Pursuant to NRS 78.207, no approval of the stockholders is
necessary to effect the increase of the authorized shares of the Corporation;
and
(f) The change to increase the number of authorized shares of the
Corporation is effective as of the date of filing of this Certificate.
Resolution No. 1 has been consented to and approved by stockholders
holding shares in the Corporation entitling them to exercise at least a majority
of the voting power, which number is sufficient under Nevada law to approve the
matter. Pursuant to NRS 78.207, Resolution No. 2 does not require the approval
of the stockholders of the Corporation.
/s/ Yiu Joe Cheung
- ---------------------------------------
Yiu Joe Cheung
President and Secretary
<PAGE>
BRITISH COLUMBIA )
) Section
CITY OF VANCOUVER )
I certify that I know or have satisfactory evidence that Yiu Joe Cheung
is the person who signed this instrument and acknowledged it to be his free and
voluntary act for the uses and purposes mentioned in this instrument.
Dated: March 13, 2000
-----------------
/s/ John Fang
-----------------------------
Notary Public
[Seal or Stamp] ------------------------------
[Printed Name]
My appointment expires: Never
------
