<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended MARCH 31, 2000
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ________________
eMAGIN CORPORATION
(Exact name of small business issuer as specified in its charter)
Commission file number: 000-24757
NEVADA 88-0378451
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2070 ROUTE 52
HOPEWELL JUNCTION, NEW YORK 12533
(Address of principal executive offices)
(914) 892-1900
(Issuer's telephone number)
-------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Not applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 8, 2000 the Registrant had
24,751,315 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
1
<PAGE>
eMAGIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Index Page Number
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 (eMagin Corporation) 3
Consolidated Balance Sheet at December 31, 1999
(FED Corporation) 4
Consolidated Statement of Operations For the Three-Months
ended March 31, 2000 (eMagin Corporation) 5
Consolidated Statements of Operations for the Periods From January 1, 2000
to March 15, 2000, the Three-Months ended March 31, 1999 and For
the Period from Inception (January 6, 1992) to March 15, 2000
(FED Corporation) 6
Consolidated Statement of Cash Flows For the Three-Months
ended March 31, 2000 (eMagin Corporation) 7
Consolidated Statements of Cash Flows for the Periods From January 1,
2000 to March 15, 2000, the Three-Months ended March 31, 1999
and For the Period from Inception (January 6, 1992) to March 15, 2000
(FED Corporation) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
EXHIBIT INDEX 17
SIGNATURE 18
</TABLE>
2
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
eMAGIN CORPORATION
----------------------------------------
ASSETS March 31, 2000 December 31, 1999
------------- ------------------
(Unaudited)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 21,637,386 --
Contract receivables 144,659 --
Unbilled costs and estimated profits on contracts
in progress 619,564 --
Prepaid expenses and other current assets 364,508 --
------------- ------------------
Total current assets 22,766,117 --
Equipment and leasehold improvements, net of accumulated
depreciation of $3,483,433 and $0, respectively 1,127,960 --
Goodwill, net of accumulated amortization of $1,028,292 and $0 77,440,372 --
Deposits and other assets 10,451 --
------------- ------------------
Total assets $ 101,344,900 --
============= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other current liabilities $ 2,534,915 --
Current portion of long term debt 291,076 --
Other short term debt 2,050,000 --
------------- ------------------
Total current liabilities 4,875,991 --
------------- ------------------
LONG-TERM DEBT 410,797 --
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 76,350,000
Shares issued and outstanding - 24,751,315 and 20,156,400, respectively 24,751 20,156
Additional paid-in capital 121,053,508 10,844
Deferred compensation (12,780,010) --
Deficit accumulated during the development stage (12,240,138) (31,000)
------------- ------------------
Total shareholders' equity 96,058,112 --
------------- ------------------
Total liabilities and shareholders' equity $ 101,344,900 $ --
============= ==================
</TABLE>
See selected notes to financial statements.
3
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
FED CORPORATION
---------------
ASSETS December 31, 1999
-----------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 718,468
Contract receivables 73,304
Unbilled costs and estimated profits on contracts
in progress 221,723
Prepaid expenses and other current assets 127,658
------------
Total current assets 1,141,153
Equipment and leasehold improvements, net of accumulated
depreciation of $3,304,138 1,214,680
Goodwill, net of accumulated amortization of $1,439,000 2,671,390
Deposits and other assets 10,451
------------
Total assets $ 5,037,674
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other current liabilities $ 2,041,100
Current portion of long term debt 268,675
Other short term debt 2,126,700
------------
Total current liabilities 4,436,475
------------
LONG-TERM DEBT 541,578
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.01 per share
Shares authorized - 40,000,000
Shares issued and outstanding - 4,380,519 43,806
Additional paid-in capital 47,254,459
Deficit accumulated during the development stage (47,238,644)
------------
Total shareholders' equity 59,621
------------
Total liabilities and shareholders' equity $ 5,037,674
============
</TABLE>
See selected notes to financial statements.
4
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
eMAGIN CORPORATION
------------------
Three-Months
ended
March 31, 2000
--------------
<S> <C>
CONTRACT REVENUE:
Contract revenue $ 12,266
------------
Total revenue 12,266
------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$358,760 623,030
Selling, general and administrative 214,303
Depreciation and amortization 1,055,646
Non-cash charge for stock-based compensation 6,484,578
Non-cash charge related to issuance of warrants 3,880,756
------------
Total costs and expenses, net 12,258,313
------------
OTHER INCOME (EXPENSE) 36,909
------------
Net loss $(12,209,138)
============
Basic and diluted net loss per common share $ (0.92)
============
Basic and diluted weighted average shares outstanding 13,253,293
============
</TABLE>
See selected notes to financial statements.
5
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FED CORPORATION
---------------
Period from
January 1, 2000 Three Months inception
through Ended (January 6, 1992)
March 15, 2000 March 31, 1999 to March 15, 2000
-------------- -------------- -----------------
<S> <C> <C> <C>
CONTRACT REVENUE:
Contract revenue $ 568,484 $ 647,043 $ 15,133,837
------------ ------------ ------------
Total revenue 568,484 647,043 15,133,837
------------ ------------ ------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$175,000 and $170,995 and $9,164,792, respectively 2,251,733 3,091,965 38,575,533
Selling, general and administrative 670,655 693,022 10,934,793
Depreciation and amortization 325,095 432,977 5,130,015
Non-cash charge for induced conversion of debt to common stock 2,940,339 -- 4,857,730
------------ ------------ ------------
Total costs and expenses, net 6,187,822 4,217,964 59,498,071
------------ ------------ ------------
OTHER EXPENSE (126,114) (46,233) (529,216)
------------ ------------ ------------
Net loss $ (5,745,452) $ (3,617,154) $(44,893,450)
============ ============ ============
Basic and diluted net loss per common share $ (1.31) $ (4.64)
============ ============
Basic and diluted weighted average shares outstanding 4,380,589 779,736
============ ============
</TABLE>
See selected notes to financial statements.
6
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
eMAGIN CORPORATION
-----------------------
Three-Months
ended
March 31, 2000
-----------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,209,138)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,055,546
Non-Cash charge for stock-based compensation 6,484,578
Non-Cash charge related to issuance of warrants 3,880,756
Changes in operating assets and liabilities-
Contract receivables (12,696)
Prepaid expenses and other current assets (58,792)
Accounts payable, accrued expenses and other current liabilities 38,798
------------
Net cash used in operating activities (820,948)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (35,000)
Acquisition, net of cash acquired 996,017
------------
Net cash used in investing activities 961,017
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 21,515,470
Payments of long term debt and capital leases (18,153)
------------
Net cash provided by financing activities 21,497,317
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,637,386
CASH AND CASH EQUIVALENTS, beginning of period --
------------
CASH AND CASH EQUIVALENTS, end of period $ 21,637,386
============
</TABLE>
See selected notes to financial statements.
7
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
March 31, 2000
<TABLE>
<CAPTION>
FED CORPORATION
---------------
Period from
January 1, 2000 Three Months inception
through Ended (January 6, 1992)
March 15, 2000 March 31, 1999 to March 15, 2000
-------------- -------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,745,452) $ (3,617,154) $(44,893,450)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 325,095 432,977 5,130,015
Gain on Sale of Assets -- -- (69,525)
Non-cash charge for induced conversion of debt to common stock 2,940,339 -- 4,857,730
Non-Cash charge related to issuance of warrants -- -- 203,000
Non-Cash charge due to beneficial conversion feature -- -- 157,500
Changes in operating assets and liabilities-
Contract receivables (58,659) (562,444) (131,963)
Unbilled costs and estimated profits on contracts in progress (397,841) 543,341 (619,564)
Prepaid expenses and other current assets (170,780) 31,351 (6,130)
Accounts payable, accrued expenses and other current liabilities 440,382 479,634 2,550,979
------------ ------------ ------------
Net cash used in operating activities (2,666,916) (2,692,295) (32,821,408)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (57,574) (16,218) (3,212,214)
Proceeds from the sale of assets 229,550
Acquisition, net of cash acquired (547,503)
------------ ------------ ------------
Net cash used in investing activities (57,574) (16,218) (3,530,167)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes, net of issuance costs -- -- 3,968,959
Proceeds from sales of common stock, net of issuance costs 1,269,378 7,089 4,688,538
Proceeds from sales of preferred stock, net of issuance costs -- 2,021,676 23,856,998
Proceeds from short term debt 2,103,290 -- 5,436,623
Payments of long term debt and capital leases (62,629) (2,977) (295,526)
------------ ------------ ------------
Net cash provided by financing activities 3,310,039 2,025,788 37,655,592
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 585,549 (682,725) 1,304,017
CASH AND CASH EQUIVALENTS, beginning of period 718,468 1,878,286 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,304,017 $ 1,195,561 $ 1,304,017
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Conversion of Debt into Common Stock $ 3,000,000 $ -- $ --
============ ============ ============
</TABLE>
See selected notes to financial statements.
8
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full year.
Prior to its acquisition of FED Corporation (FED) on March 16, 2000 discussed
below, Fashion Dynamics Corporation (FDC) had no active business operations.
Accordingly, for all financial information required for periods prior to the
March 16, 2000 acquisition, FED's historical financial statements have been
presented herein as the predecessor entity.
Note 2 - NATURE OF BUSINESS
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED (the
Merger). The merged company changed its name to eMagin Corporation (the Company
or eMagin) (Note 3). FED is a developer and manufacturer of optical systems and
microdisplays for use in the electronics industry. FED's wholly-owned
subsidiary, Virtual Vision, develops and markets microdisplay systems and optics
technology for commercial, industrial and military applications. Following the
Merger, the business conducted by the Company is the business conducted by FED
prior to the Merger.
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 is 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 commercialization of products
using organic light emitting diode (OLED) technology.
Note 3 - FED ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock and approximately 1.6 million options and warrants to purchase
common stock to the FED shareholders. The total preliminary purchase price of
the transaction is approximately $78.8 million, including $73.4 million of
value relating to the shares issued (at a fair value of $7 per share, the
value a simultaneous private placement transaction of similar securities),
$0.9 million of value relating to the options and warrants exchanged, based
on the difference between the fair value and the exercise price of said
equity instruments, and $6.9 million of assumed liabilities. The transaction
was accounted for using the purchase method of accounting. The results of FED
Corporation for the period March 16, 2000 through March 31, 2000 are included
in the eMagin consolidated statements of operations for the three months
ended March 31, 2000. Under the purchase method of accounting, the assets and
liabilities will be recorded based upon their fair values at the date of
acquisition. As of March 31, 2000, the preliminary allocation of values to
the acquired assets and liabilities, including the allocation of goodwill,
have been based on the Company's best estimates of value. The final
allocation of the purchase price will be based on appraisals made by an
independent appraiser and a comprehensive final evaluation of the fair value
of assets acquired and liabilities assumed by FDC. In its preliminary
allocation of purchase price, in connection with the
9
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Merger, the Company recorded goodwill of approximately $78.8 million, which is
being amortized over three years. For the period ended March 31, 2000, eMagin
recorded approximately $1.0 million in amortization expense relating to
goodwill.
Note 4 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) include the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from research and development contracts is recognized as a reduction in
operating expenses during the period in which the services are performed and
related direct expenses are incurred.
Note 5 - NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed by using the weighted
average number of shares of common stock outstanding during the period, restated
for the effect of the merger upon the number of shares outstanding in the
current year. No common stock equivalents have been included in the computation
of weighted average shares outstanding, as their effect would be anti-dilutive.
Note 6 - STOCKHOLDERS' EQUITY
Prior to the Merger on March 16, 2000, approximately $27.3 million was raised
through the private placement issuance of approximately 3.5 million shares of
common stock and the conversion of $3.0 million of debt into equity of FED
Corporation. Additionally, approximately 9.4 million shares of common stock held
by FDC's principal shareholders were cancelled at the time of the Merger.
In connection with the Merger, the Company repriced approximately 325,000 common
stock options issued to employees. The repricing resulted in non-cash
compensation expense of approximately $6.2 million for the period ended March
31, 2000. Subsequently, these shares will be accounted for under variable plan
accounting for the remainder of their exercise periods, or until such time that
the options are exercised or otherwise forfeited.
Also in connection with the Merger, the Company repriced approximately 215,000
warrants issued to outside consultants and organizations that provided bridge
loans and funding commitments to the Company. The repricing resulted in a
non-cash charge of approximately $1.2 million, which is included in the
accompanying consolidated statement of operations for the period ended March 31,
2000.
The Company issued options to purchase common stock to employees at an exercise
price below the fair market value on the date of grant of $7.00. These options
vest over a period of 48 - 60 months. As a result, the Company has recorded
deferred compensation expense in the amount of approximately $13.1 million, of
which approximately $265,000 was amortized during the period ended March 31,
2000. The remaining balance will be amortized over the vesting period of the
options.
The Company issued warrants to shareholders (non-employees) at an exercise price
below the fair market value on the date of grant. As a result, the Company has
recorded a one-time compensation expense of approximately $2.6 million which is
included in the accompanying consolidated statement of operations for the period
ended March 31, 2000.
The recipients of the repriced options and warrants were required to execute
lock-up agreements (the Lock Up Agreements) that prohibit any disposition of the
underlying shares for a period of 18 months following the Merger, thereafter the
recipients may transfer no more that 20% of the underlying shares in the 6
months
10
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.")
SELECTED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - STOCKHOLDERS' EQUITY (continued)
following the end of the 18-month period, and the balance of the underlying
shares may be transferred 24-27 months after the Merger.
Note 7 - RECENT ACCOUNTING PRONOUNCEMENT
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." The Statement defers for one year the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
was issued in June 1998 and established 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 measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133 will
now apply to all fiscal quarters of all fiscal years beginning after June 15,
2000. Management believes that the implementation of SFAS No. 133 will not have
a material impact on results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
eMAGIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999
STATEMENT OF FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of such terms, or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. In this regard, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Form 10-QSB. In evaluating the
Company's business, you should give careful consideration to the information set
forth below under the caption "Risk Factors That May Affect Future Operating
Results," in addition to the other information set forth herein. We undertake
no duty to update any of the forward-looking statements, whether as a result
of new information, future events or otherwise. In light of the foregoing,
readers are cautioned not to place undue reliance on the forward-looking
statements contained in this report.
OVERVIEW
eMagin Corporation is a leading developer of organic light emitting diode (OLED)
microdisplays and optics systems. We currently provide custom video display
headsets, in limited quantities, largely to government customers. We are seeking
to transition into commercial distribution of our products and technology as
components to OEM system manufacturers for near-eye and headset applications in
products such as wearable computers, handheld telecommunication devices, and
computer and entertainment headsets.
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. For the past three years, FDC has had no active
business operations, and has been seeking to acquire an interest in a business
with long-term growth potential. On March 16, 2000, FDC acquired FED and
subsidiary (the FDC Merger) through its wholly-owned subsidiary, FED Capital
Acquisition Corporation. In connection with the Merger, FDC changed its name
to eMagin Corporation (the Company) (derived from "electronic imaging"), and
listed its Common Stock on the American Stock Exchange.
The FDC Merger was accounted for using the purchase method of accounting and
the assets and liabilities were recorded based upon their fair values at the
date of acquisition. For purposes of the unaudited consolidated financial
statements, the preliminary fair values of the Company's assets and liabilities
were based on the Company's best estimates of their fair market valuation. The
final allocation of the purchase price will be based
12
<PAGE>
on appraisals made by an independent appraiser and a comprehensive final
evaluation of the fair value of assets acquired and liabilities assumed by FDC.
In connection with the FDC Merger, the Company recorded goodwill of
approximately $74.0 million, which is being amortized over three years. For the
period ended March 31, 2000, eMagin recorded approximately $1.0 million in
amortization expense related to goodwill.
FED Corporation was incorporated in 1992 in Raleigh, NC. Its original purpose
was the development and commercialization of flat panel display technology for
displaying data, information, and video. As a result of the Company's successful
research in the area of field emission displays (FEDs), it was awarded
approximately $13 million in government contracts to support field emission
display technology development.
In 1994, FED relocated its operations to IBM's East Fishkill, NY campus,
purchased equipment for manufacturing and research and development. In 1996 FED
began work related to the manufacturing and design of microdisplays based upon
Eastman Kodak's small molecule, OLED technology and, in 1997 FED Corporation
acquired a license from Eastman Kodak to commercialize this technology. Since
1997, FED has applied this OLED technology to produce high resolution
microdisplay applications in which a small (such as 0.5-in. diagonal) display
is magnified via optics to produce a larger (e.g., 19-inch) virtual image. FED
has been granted 44 patents, 3 notices of allowance and has 59 patents pending
that relate to OLED, field emission displays, optics, and potential system
implementation.
In April 1998 FED acquired Virtual Vision, Inc. for the purpose of accelerating
the emergence of a commercial market for video headsets.This acquisition
provided FED with a second core competency in advanced optics that complements
its expertise in semiconductor and display technology. In 1998 FED established a
sales and marketing office in Santa Clara, CA.
The Company has produced several preliminary prototype versions of the OLED
microdisplay, including monochromatic and color display devices. In addition,
Virtual Vision has produced prototypes of headset systems that incorporate
commercially available liquid crystal displays. The Company expects to continue
funding the development of prototype and demonstration versions of products
incorporating OLED microdisplay and optics technology at least through 2001.
Future revenues, profits and cash flow and the Company's ability to achieve its
strategic objectives as described herein will depend on a number of factors
including acceptance of the OLED technology by various industries and OEMs,
market acceptance of products incorporating the OLED technology, and the
technical performance of such products. The Company expects to continue to incur
significant operating losses until such time that it is selling its products in
commercial quantities.
The following information should be read in conjunction with the consolidated
interim financial statements and notes thereto in Part 1 Item 1 of this
Quarterly Report.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
REVENUE
For the three months ending March 31, 2000 and for the same period in 1999, the
Company had revenues of $0.6 million. Revenue consisted of research and
development contract funding received under government-funded programs. To date,
the Company has been awarded fourteen U.S. government contracts, of which twelve
have been completed, and two (2) remain active. The remaining costs to be
incurred and billed on these two contracts as of March 31, 2000 was $5.2
million.
Overall government R&D contract support remains strong, but remains subject to
unpredictable government funding issues and periodic slow payment.
13
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include salaries, development materials,
equipment lease and depreciation expense, electronics, rent, utilities and costs
associated with operating the Company's manufacturing facility. The Company has
received cost sharing awards from the U.S. Department of Commerce, the
Department of the Air Force and the Department of the Army. As of March 31,
2000, the remaining costs to be incurred and billed on these four active "cost
sharing" contracts totalled $3.3 million. Gross research and development
expenses were $3.4 million for the three months ended March 31, 2000 as compared
to $3.3 million for the three months ended March 31, 1999. Of these amounts, the
Company received $0.5 million and $0.2 million in cost sharing from the U.S.
Government as of March 31, 2000 and 1999, respectively. The $0.1 million
increase in gross expenses over these time periods reflects the additional
costs associated with personnel costs, equipment leases, depreciation, and
material costs resulting from increased research and development activities
and equipment additions at the Company's manufacturing facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist principally of salaries and
fees for professional services, legal fees incurred in connection with patent
filing and related matters, amortization, as well as other marketing and
administrative expenses. General and administrative costs were $15.6 million and
$1.1 million for the three months ended March 31, 2000 and 1999, respectively.
Of the $14.5 million increase, $0.2 million represented additional personnel
costs, legal fees incurred in connection with patent filings, and other
marketing and administrative expenses, $2.9 million related to the expense
associated with the conversion of two convertible notes into equity prior to the
merger, $1 million related to the increased amortization associated with the
increase in goodwill created by the merger, $6.2 million related to non-cash
compensation expense associated with the repricing of 325,248 employee options
prior to the FDC Merger, the issuance of 2,545,360 employee options prior to the
merger resulted in a deferred compensation expense of $13 million which
resulted in a $0.3 million non-cash compensation expense for the quarter. $1.2
million related to the non-cash consulting expense associated with repricing
214,946 warrants and the reduction of 421,692 warrants outstanding, that had
been previously issued to consultants of the company and $2.6 million related to
the non-cash expense associated with the issuance of 454,760 warrants, which
were obtained in the repricing of the warrants mentioned above and issued to
former FED Corporation shareholders, prior to the FDC Merger, that agreed to the
lock up agreements described below.
The recipients of the repriced options and warrants were required to execute
lock-up agreements (the Lock Up Agreements) that prohibit any disposition of the
underlying shares for a period of 18 months following the Merger, thereafter the
recipients may transfer no more that 20% of the underlying shares in the 6
months following the end of the 18-month period, and the balance of the
underlying shares may be transferred 24-27 months after the Merger.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Investment in the shares of our common stock involves a high degree of
risk. Investors should carefully consider the risks described below, together
with all of the other information included in this report, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
investors may lose all or part of their investment.
14
<PAGE>
NEED FOR ADDITIONAL FINANCING.
During the next 12 months, the Company's foreseeable cash requirements are
expected to be met by a combination of existing cash, revenue generated by the
Company's sales, and additional equity financing. The Company is currently
devoting substantial resources to the development of its products and to the
establishment of sales and distribution relationships. Substantial additional
capital may be required in the future to fund product development and product
launch cycles. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to the Company or its shareholders. If needed capital is unavailable,
the Company's ability to continue in business will be jeopardized. To the extent
the Company raises additional capital by issuing equity or securities
convertible into equity, ownership dilution to the Company's shareholders will
result.
HISTORY OF LOSSES AND NEGATIVE CASH FLOW; ANTICIPATED CONTINUED LOSSES.
Since the Company's inception, it has incurred significant losses and
negative cash flow. The Company has not achieved profitability and it expects to
continue to incur operating losses for the foreseeable future as it funds
operating and capital expenditures in areas such as establishment and expansion
of markets, advertising, brand promotion, sales and marketing, research and
development and operating infrastructure. The Company cannot assure investors
that it will ever achieve or sustain profitability or that its operating
losses will not increase in the future.
COMPETITION.
The market for organic light emitting diode (OLED) microdisplays, and
optics systems is highly competitive. The competition for the Company's products
comes largely from large, well-established multinational companies with longer
operating histories, greater name recognition, larger retail bases and
significantly greater financial, technical, and marketing resources than the
Company. Competition from these sources could materially adversely affect the
Company's business, operating results or financial condition. Competitive
factors in the OLED market include innovative products, product quality,
marketing and distribution resources and price. While the Company believes
that it has the experience and ability to compete within its identified
market, there can be no assurance that the Company will be able to compete
successfully against current or future competitors.
RELIANCE ON KEY INDIVIDUALS
The Company is dependent upon the active participation of several key
management personnel. The Company does not currently maintain key employee
insurance policies. The Company will likely need to recruit additional
qualified personnel in order to expand according to its business plan. The
duties of the Chief Financial Officer are being fulfilled by the Vice
President, Finance and Administration (Acting CFO). There can be no assurance
that eMagin will be able to attract such persons or retain any of its key
personnel. The failure to attract and retain key personnel could have a
material adverse effect on the Company's results of operations and financial
performance.
15
<PAGE>
PRODUCT LIABILITY.
The Company's business exposes it to potential product liability claims
which are inherent in the manufacture and sale of light emitting diode (OLED)
microdisplays, and optics systems. Although no such claim has been brought
against the Company to date, and to the knowledge of the Company no such claim
is threatened or likely, the Company may face liability to product users for
damages resulting from the faulty design or manufacture of products. Although
the Company maintains product liability insurance coverage, there can be no
assurance that product liability claims will not exceed coverage limits or that
such insurance will continue to be available at commercially reasonable rates,
if at all. Consequently, a product liability claim or other claim in excess of
insured liabilities or with respect to uninsured liabilities could have a
material adverse effect on the Company.
DEPENDENCE ON NEW MARKETS
The Company's future growth, if any, depends in part on its ability to
penetrate new markets. There can be no assurance that eMagin will be successful
in locating or penetrating any new markets for its products.
SHARE PRICE VOLATILITY.
The trading price of the Common Stock could be subject to wide fluctuations
in response to quarter to quarter variations in operating results, changes in
earnings estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
personal products industries and other events or factors. In addition, in recent
years the stock market in general has experienced extreme price fluctuations.
This volatility has had a substantial effect on the market price of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. To date, the Company's Common Stock has not
traded in sufficient volumes, or for a sufficient length of time, to produce any
meaningful evidence of correlation between its price and general market
volatility.
16
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 16, 2000, FED Capital Acquisition Corporation, a Delaware
corporation ("Merger-Sub"), and wholly-owned subsidiary of 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"). 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 10,486,386 shares of
its authorized but unissued common stock (the "Exchange Shares") 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 42% of the outstanding common stock of the Company
following the Merger. All outstanding options to purchase FED common stock
(excluding 1,188,180 option shares held by former FED stockholders not
included within the Exchange Shares) 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 price of $7.59 per share, vesting according to
various schedules. The issuance of the Exchange Shares was exempt from
registration pursuant to Rule 506 under the Securities Act of 1933, as
amended.
In connection with the Merger, the Company changed its name to "eMagin
Corporation" and it also sold 3,464,547 shares of its Common Stock pursuant
to Rule 504 under the Securities Act of 1933, as amended, for an aggregate
purchase price of $24,251,830.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 29, 2000, a Special Meeting of the Shareholders of the Company
was held (the "Special Meeting"). The meeting did not involve the election of
directors. The following matters were voted on, in person or by proxy, at the
Special Meeting:
1) The proposal of the Company's Board of Directors to amend the Company's
Articles of Incorporation to change the name of the Company to "eMagin
Corporation."
VOTES FOR: 11,711,151 VOTES AGAINST: 200 ABSTENTIONS/NON-VOTES: 8,445,049
2) The proposal to approve the adoption by the Company's Board of Directors
of the Company's 2000 Stock Option Plan
VOTES FOR: 11,710,951 VOTES AGAINST: 400 ABSTENTIONS/NON-VOTES: 8,445,049
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
- -------------- --------------------------------------------------------------
10.11* Agreement and Plan of Merger (exclusive of schedules and
exhibits) dated as of March 15, 2000 by and between eMagin
Corporation, FED Capital Acquisition Corporation, and FED
Corporation, as filed in the Company's Form 8-K filed March
17, 2000.
27.1 Financial Data Schedule.
* Incorporated herein by reference.
(b) Reports on Form 8-K.
On March 17, 2000, the Company filed a Form 8-K Current Report announcing
the acquisition of FED Corporation pursuant to the terms of an Agreement and
Plan of Merger dated March 15, 2000. On March 17, 2000, the Company also filed a
Form 8-K/A amending such Current Report.
On March 23, 2000, the Company filed a Form 8-K Current Report announcing
the resignation of the Company's independent auditor, Barry L. Friedman, P.C.,
and the appointment of Arthur Andersen LLP as its new independent auditor.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eMAGIN CORPORATION
Dated: May 22, 2000 By: /s/ Edward V. Flynn
-------------------------------------
Edward V. Flynn
Chief Financial Officer
(Principal Financial
and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 21,637,386
<SECURITIES> 0
<RECEIVABLES> 144,659
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,766,117
<PP&E> 4,611,393
<DEPRECIATION> 3,483,433
<TOTAL-ASSETS> 101,344,900
<CURRENT-LIABILITIES> 4,875,991
<BONDS> 0
0
0
<COMMON> 24,751
<OTHER-SE> 121,053,508
<TOTAL-LIABILITY-AND-EQUITY> 101,344,900
<SALES> 0
<TOTAL-REVENUES> 12,266
<CGS> 0
<TOTAL-COSTS> 12,258,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,209,138)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,209,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,209,138)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
