<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(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)
(845) 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
25,068,063 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
<PAGE>
eMAGIN CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
Index Page Number
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2000, (unaudited), (as restated)
and December 31, 1999 (eMagin Corporation) 3
Consolidated Balance Sheet at December 31, 1999
(FED Corporation - Predecessor) 4
Unaudited consolidated Statement of Operations For the Three-Months
ended March 31, 2000 , (as restated)
(eMagin Corporation) 5
Unaudited consolidated Statements of Operations for the Periods From January 1, 2000
through March 15, 2000, (as restated) the Three-Months ended March 31, 1999 and
For the Period from Inception (January 6, 1992) to March 15, 2000 (as restated)
(FED Corporation - Predecessor) 6
Unaudited consolidated Statement of Cash Flows For the Three-Months
ended March 31, 2000 (eMagin Corporation), (as restated) 7
Unaudited consolidated Statements of Cash Flows for the Periods From January 1, 2000
through March 15, 2000, (as restated) the Three-Months
ended March 31, 1999 and For the Period from Inception
(January 6, 1992) to March 15, 2000 (as restated) (FED Corporation - Predecessor) 8
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
PART II OTHER INFORMATION
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
EXHIBIT INDEX 17
SIGNATURE 18
</TABLE>
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") and Predecessor
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
eMagin Corporation
---------------------------------------------------
ASSETS March 31, 2000 December 31, 1999
---------------------------------------------------
(Unaudited)
(as restated, see Note 7)
<S> <C> <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 $27,354 and $0, respectively 1,127,960 --
Goodwill, net of accumulated amortization of $1,186,698 and $0 84,255,561 --
Deposits and other assets 10,451 --
---------------------------------------------------
Total assets $108,160,089 --
===================================================
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 410,798 --
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 76,350,000
Shares issued and outstanding - 25,068,063 and 10,800,382,
respectively 25,068 10,800
Additional paid-in capital 117,911,274 20,200
Deferred Compensation (12,774,886) --
Deficit accumulated during the development stage (2,288,156) (31,000)
---------------------------------------------------
Total shareholders' equity 102,873,300 --
---------------------------------------------------
Total liabilities and shareholders' equity $108,160,089 $ --
===================================================
</TABLE>
See selected notes to financial statements.
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") AND PREDECESSOR
(a development stage corporation)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
FED Corporation
- Predecessor
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 47,210,655
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
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") AND PREDECESSOR
(a development stage corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
eMagin Corporation
------------------
Three-Months
ended
March 31, 2000
-----------------------
(as restated, see Note 7)
<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 241,657
Amortization of purchased intangibles 1,186,698
Amortization of deferred compensation 254,946
-----------------------
Total costs and expenses, net 2,306,331
-----------------------
INTEREST INCOME, net 36,909
-----------------------
Net loss $ (2,257,156)
=======================
Basic and diluted net loss per common share $ (0.17)
=======================
Basic and diluted weighted average shares outstanding 13,312,240
=======================
</TABLE>
See selected notes to financial statements
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") AND PREDECESSOR
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FED Corporation
- Predecessor
Period from
January 1, 2000 Three-Months inception
through Ended (January 6, 1992)
March 15, 2000 March 31,1999 to March 15, 2000
---------------------- -------------------- -------------------
(as restated, (as restated,
see Note 7) see Note 7)
<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 2,180,519 3,091,965 38,433,105
Selling, general and administrative 670,655 693,022 10,934,793
Depreciation and amortization 325,095 432,977 5,130,015
Non-cash charges for stock-based compensation 7,778,850 - 9,696,241
---------------------- -------------------- -------------------
Total costs and expenses, net 10,955,119 4,217,964 64,194,154
---------------------- -------------------- -------------------
INTEREST (EXPENSE), net (2,968,414) (46,233) (3,371,516)
---------------------- -------------------- -------------------
Net loss $ (13,355,049) $ (3,617,154) $ (52,431,833)
====================== ==================== ===================
Basic and diluted net loss per common share $ (3.03) $ (4.64)
====================== ====================
Basic and diluted weighted average shares outstanding 4,438,095 779,736
====================== ====================
</TABLE>
See selected notes to financial statements
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") AND PREDECESSOR
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
eMagin Corporation
-----------------------
Three-Months
ended
March 31, 2000
-----------------------
(as restated,
see Note 7)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,257,156)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 27,354
Amortization of purchased intangibles 1,186,698
Amortization of deferred compensation 254,946
Changes in operating assets and liabilities, net of acquisition-
Contract receivables (12,696)
Prepaid expenses and other current assets (58,792)
Accounts payable, accured expenses and other current liabilities (6,224)
-----------------------
Net cash used in operating activities (865,870)
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (35,001)
Net proceeds from acquisition 995,594
-----------------------
Net cash provided by investing activities 960,593
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 21,558,294
Payments of long term debt and capital leases (15,631)
-----------------------
Net cash provided by financing activities 21,542,663
-----------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S 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
<PAGE>
eMAGIN CORPORATION ( formerly "Fashion Dynamics Corp.") AND PREDECESSOR
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FED Corporation - Predecessor
----------------------------------------------------------
Period from
January 1, 2000 Three-Months inception
through Ended (January 6, 1992)
March 15, 2000 March 31, 1999 to March 15, 2000
-------------------- ---------------- -----------------
(as restated, (as restated,
see Note 7) see Note 7)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($13,355,049) ($3,617,154) ($52,431,833)
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)
Amortization of debt discount 2,940,339 - 2,940,339
Non-cash charge related to induced conversion of debt - - 1,917,391
Non-cash charges related to stock-based compensation 7,778,850 7,778,850
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 (178,058) 31,351 (13,408)
Accounts payable, accrued expenses and other current liabilities 488,516 479,634 2,527,899
---------------- --------------- ----------------
Net cash used in operating activities (2,456,807) (2,692,295) (32,611,299)
---------------- --------------- ----------------
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 - - 3,968,958
Proceeds from sales of common stock, net of issuance costs 1,269,378 7,089 4,602,711
Proceeds from sales of preferred stock, net of issuance costs - 2,021,676 23,856,998
Proceeds from short term debt 1,923,300 - 5,342,460
Payments of long term debt and capital leases (92,748) (2,977) (325,644)
---------------- --------------- ----------------
Net cash provided by financing activities 3,099,930 2,025,788 37,445,483
---------------- --------------- ----------------
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
<PAGE>
eMAGIN CORPORATION (formerly "Fashion Dynamics Corp.") and Predecessor
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) was a blind pool company with no
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) (Note 3). The merged company changed its name to eMagin Corporation (the
Company or eMagin). Following the Merger, the business conducted by the Company
is the business conducted by FED prior to the Merger. eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision, develops and markets
microdisplay systems and optics technology for 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 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 to the FED shareholders to acquire 100% of the outstanding common
stock of FED, at an exchange rate of 2 for 1. Additionally, eMagin issued
approximately 3.9 million options and warrants to purchase common stock to
holders of FED options and warrants, at the same relative terms of the options
and warrants previously held. The total preliminary purchase price of the
transaction is approximately $98.4 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), $20.9 million
of value relating to the options and warrants exchanged, $.3 million of
acquisition costs and $3.8 million of net liabilities assumed. 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. 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, the
Company allocated approximately $13 million of the purchase price to deferred
compensation (representing that portion of the value of options and warrants
exchanged which vest in the future as additional services are provided by
employees) and recorded goodwill of approximately $85.4 million, which is being
amortized over three years. For the period ended March 31, 2000, eMagin recorded
approximately $1.2 million in amortization expense relating to goodwill.
<PAGE>
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 and, for the presentation of net loss per share for the
predecessor, a stock split effected during 1999. 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 the company raised approximately $21.5
million through the private placement issuance of approximately 3.5 million
shares of common stock. At the time of the Merger, $3 million of bridge loans
funded to FED prior to the Merger were also converted into common stock.
Additionally, approximately 9.4 million shares of common stock held by FDC's
principal shareholders were cancelled at the time of the Merger. Such shares are
considered as not outstanding for the entire period presented.
Prior to the Merger, the predecessor company repriced approximately 325,000
common stock options issued to employees. The repricing resulted in a non-cash
compensation expense of approximately $2.7 million for the period ended March
15, 2000.
Also prior to the Merger, the predecessor company repriced approximately 108,000
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 predecessor company
period ended March 15, 2000.
In 2000, the predecessor company issued options to purchase common stock to
employees at an exercise price below the fair market value on the date of grant
(estimated using the $7.00 per share price of the subsequent private placement
transaction effected at the time of the Merger). These options vest over a
period of 1 - 60 months with a minimum lockup period of 18 months. As a result,
the Company recorded deferred compensation expense in the amount of
approximately $12.5 million, of which approximately $0.3 million was amortized
during the period ended March 15, 2000.
The predecessor Company also issued warrants to shareholders at an exercise
price below the fair market value on the date of grant. As a result, the
predecessor Company recorded a one-time compensation expense of approximately
$2.5 million for the period ended March 15, 2000.
The recipients of the repriced options and warrants were required to execute
lock-up agreements that prohibit 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.
<PAGE>
Note 7 - RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2000, it was determined that certain equity transactions
consummated by FED Corporation (the predecessor) prior to the Merger were
recorded in the incorrect period.
A summary of the effect of the restatement is as follows:
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------
eMagin Corporation FED Corporation - Predecessor
---------------------------------------------------------------------------------------------------
Period From January 1, 2000 to March
Three Months Ended March 31, 2000 15, 2000
---------------------------------------------------------------------------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
---------------------------------------------------------------------------------------------------
Net loss $(12,209,138) $(2,257,156) $(5,745,452) $(13,355,049)
---------------------------------------------------------------------------------------------------
Basic and
diluted loss per
common share $(0.92) $(0.17) $(1.31) $(3.03)
---------------------------------------------------------------------------------------------------
</TABLE>
Note 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44 clarifies
the definition of employees, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occurred after either December 15,
1998 or January 1, 2000. We do not expect that the adoption of FIN 44 will have
a material effect on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of SAB No.
101 until the fourth quarter of fiscal 2000. Management is currently evaluating
the impact of adopting this SAB but management does not believe that it will
have a material impact on Learn2.com's financial position or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivaties) and for hedging activities, and is effective for all quarters of
all fiscal years beginning after June 15, 2000. The Company does not expect
adoption of this statement to have a material impact on its consolidated
financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2000, it was determined that certain equity transactions
consummated by FED Corporation (the predecessor) prior to the Merger were
recorded in the incorrect period. The effect of the restatement on the Company's
financial statements for the three months ended March 31, 2000, and on the
financial statements of the predecessor for the period from January 1, 2000 to
March 15, 2000, are presented in Note 7 to the unaudited financial statements
and have been reflected herein.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999
Statement Regarding 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
<PAGE>
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. We undertake no duty
to update any of the forward-looking statements, whether as a result of new
information, future events or otherwise. 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.
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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
Prior to the acquisition of FED Corporation, the Company had no operations.
Management believes that the comparison of eMagin's financial results to that of
the operating entity (FED Corporation) provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
effects the operating results of FED Corporation for all periods prior to the
Merger and it should be read in conjunction with the consolidated interim
financial statements and notes thereto in Part 1 Item 1 of this Quarterly
Report. The comparison of financial information below for the period ended March
31, 2000 reflects pro forma results of eMagin for the period January 1, 2000
through March 31, 2000 and its predecessor FED Corporation for the period
January 1, 2000 through March 15, 2000, on a combined basis, such that the
amounts presented and discussed reflect the full three months of operations for
each period. Reference is made to the Company's consolidated financial
statements that are included herein, for further detail on the results of eMagin
and FED Corporation for their respective periods of ownership.
Revenue
For the three months ending March 31, 2000 and for the same period in 1999, the
Company had revenues of $0.6 million. Revenues consist primarily of contracts
funded by certain U.S. government programs, and the amount of revenues earned in
any period is dependent upon, among other factors, the execution of new
government contracts and funding issues, and may not be predictable or
consistent from period to period but remain subject to unpredictable government
funding issues.
<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 and,
historically, the predecessor, have received cost sharing awards from certain
U.S. government agencies to fund certain research and development. As of
March 31, 2000, the remaining costs to be incurred and billed on four active
"cost sharing" contracts totalled $3.3 million. Gross research and development
expenses were $3.3 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.
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, depreciation, as well as other marketing and
administrative expenses. Selling, general and administrative expenses, for the
three months ending March 31, 2000 were $0.9 million as compared to $0.7 million
for the three months ended March 31, 1999. The increase in selling, general and
administrative expenses is primarily due to increases in marketing activity,
personnel costs, travel and patent filings.
Amortization of purchased intangibles
Amortization of purchased intangibles expense for the three months ending
March 31, 2000 was $1.4 million as compared $0.2 million for the three months
ended March 31, 1999. The increase in amortization for purchased intangibles
expense is caused by the amortization of the preliminary allocation of purchase
price to goodwill created by the Merger.
Non-cash charges for stock-based compensation
Non-cash stock-based compensation expense for the three months ending March 31,
2000 was $8.0 million as compared to no activity for the three months ended
March 31, 1999. The activity for the three months ended March 31, 2000, reflects
a one time charge of $7.8 million of repriced options and warrants by the
predecessor Company prior to the Merger. The remaining $0.2 million reflects
amortization of deferred compensation costs associated with non-cash stock based
compensation.
Liquidity and Capital Resources
Since inception we have financed our operations primarily through private
placements of equity securities and research and development contracts.
Net cash used in operating activities was $3.3 million for the three months
ended March 31, 2000. Cash used in operating activities resulted primarily from
our net loss offset by increases from non-cash charges.
Net cash provided by investing activities was $0.9 million for the three months
ended March 31, 2000. This represented proceeds from the acquisition of FED of
$1.0 million.
Net cash provided by financing activities was $24.6 million for the three months
ended March 31, 2000, and consisted primarily of proceeds from the issuance of
common stock in a private placement net of issuance costs of $2.7 million offset
by decreases in short term debt and capital leases. As of March 31, 2000, we had
$21.6 million in cash and cash equivalents.
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 and debt financing. The Company is
<PAGE>
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. Additional financing may not be available or if
available, such financing may not 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.
PART II--OTHER INFORMATION
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
$1.72 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 $1.72 per share vesting
over 3 months from the date of the Merger, and (iii) 849,516 shares of Company
Common Stock at an average exercise price of $2.85 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 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.
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
<PAGE>
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 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 13, 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 13, 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.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eMAGIN CORPORATION
Dated: November 14, 2000 By: /s/ Andrew P. Savadelis
--------------------------------
Andrew P. Savadelis
Executive Vice President, Finance
and Chief Financial Officer
