<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 June 30, 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 August 14, 2000 the Registrant
had 24,752,394 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
<PAGE>
<TABLE>
<CAPTION>
Index Page Number
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2000 (unaudited) and
December 31, 1999 (eMagin), and at December 31, 1999
(FED Corporation - Predecessor) 1
Consolidated Statements of Operations For the Three-Months and Six-Months
ended June 30, 2000 (unaudited) 2
Consolidated Statements of Operations For the Periods from January 1, 2000
to March 15, 2000, the Three-Months and Six-Months ended June 30, 1999,
and for the Period from Inception (January 6, 1992) to March 15, 2000
(FED Corporation - Predecessor) (unaudited) 3
Consolidated Statements of Cash Flows For the Period Six-Months
ended June 30, 2000 (unaudited) (eMagin), For the Period from January 1, 2000
to March 15, 2000, the Six-Months ended June 30, 1999 and for the Period
from Inception (January 6, 1992) to March 15, 2000 (FED Corporation -
Predecessor) (unaudited) 4
Selected Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
</TABLE>
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eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS, CORP.) and Predecessor
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
EMAGIN CORPORATION FED CORPORATION
------------------ ----------------
ASSETS June 30, 2000 December 31, 1999 December 31, 1999
------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,971,557 $ -- $ 718,468
Contract receivables 17,266 -- 73,304
Unbilled costs and estimated profits on contracts
in progress 1,308,393 -- 221,723
Prepaid expenses and other current assets 349,119 -- 127,658
------------- ----------------- -----------------
Total current assets 16,646,335 -- 1,141,153
Equipment and leasehold improvements, net of accumulated
depreciation of $3,642,249, $0, and $3,304,139, respectively 1,377,590 -- 1,214,680
Goodwill, net of accumulated amortization of $7,627,877, $0, and
$1,439,000, respectively 70,830,296 -- 2,671,390
Deposits and other assets 10,451 -- 10,451
------------- ----------------- -----------------
Total assets $ 88,864,672 $ -- $ 5,037,674
============= ================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other current liabilities $ 1,242,742 $ -- $ 2,041,100
Deferred revenue 550,000 -- --
Current portion of long term debt 303,048 -- 268,675
Other short term debt -- -- 2,126,700
------------- ----------------- -----------------
Total current liabilities 2,095,790 -- 4,436,475
------------- ----------------- -----------------
LONG-TERM DEBT 340,030 -- 541,578
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 76,350,000, 0, and 40,000,000, respectively
Shares issued and outstanding - 24,752,394, 10,800,382 and
4,380,519, respectively 24,752 10,800 43,806
Additional paid-in capital 118,309,485 20,200 47,254,459
Deferred compensation (11,885,491) -- --
Deficit accumulated during the development stage (20,019,894) (31,000) (47,238,644)
------------- ----------------- -----------------
Total shareholders' equity 86,428,852 -- 59,621
------------- ----------------- -----------------
Total liabilities and shareholders' equity $ 88,864,672 $ -- $ 5,037,674
============= ================= =================
</TABLE>
See selected notes to financial statements.
1
<PAGE>
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS, CORP.) and Predecessor
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
eMAGIN CORPORATION
Three-Months Six-Months
ended ended
June 30, 2000 June 30, 2000
------------------ ------------------
<S> <C> <C>
CONTRACT REVENUE:
Contract revenue $ 828,394 $ 840,660
------------------ ------------------
Total revenue 828,394 840,660
------------------ ------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$644,880 and $1,003,640, respectively 2,616,684 3,239,714
Selling, general and administrative 1,450,774 1,665,077
Depreciation and amortization 6,540,310 7,595,956
Non-cash charge for stock-based compensation (1,710,680) 4,773,898
Non-cash charge related to issuance of warrants -- 3,880,756
------------------ ------------------
Total costs and expenses, net 8,897,088 21,155,401
------------------ ------------------
OTHER INCOME 288,938 325,847
------------------ ------------------
Net loss $ (7,779,756) $ (19,988,894)
================== ==================
Basic and diluted net loss per common share $ (0.31) $ (1.05)
================== ==================
Basic and diluted weighted average common shares outstanding 24,751,327 19,002,310
================== ==================
</TABLE>
See selected notes to financial statements.
2
<PAGE>
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS, CORP.) and Predecessor
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FED CORPORATION
---------------
Period from
January 1, 2000 Three-Months Six-Months inception
through Ended Ended (January 6, 1992)
March 15, 2000 June 30, 1999 June 30, 1999 to March 15, 2000
--------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
CONTRACT REVENUE:
Contract revenue $ 568,484 $ 428,597 $ 1,075,640 $ 15,133,837
--------------- -------------- -------------- ------------------
Total revenue 568,484 428,597 1,075,640 15,133,837
--------------- -------------- -------------- ------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$175,000, $439,318, $610,313 and
$9,164,792, respectively 2,251,733 2,039,613 5,131,578 38,575,533
Selling, general and administrative 670,655 1,068,504 1,907,958 10,934,793
Depreciation and amortization 325,095 279,629 566,174 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 3,387,746 7,605,710 59,498,071
--------------- -------------- -------------- ------------------
OTHER EXPENSE (126,114) (50,611) (96,844) (529,216)
--------------- -------------- -------------- ------------------
Net loss $ (5,745,452) $ (3,009,760) $ (6,626,914) $ (44,893,450)
=============== ============== ============== ==================
</TABLE>
See selected notes to financial statements.
3
<PAGE>
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS, CORP.) and Predecessor
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
eMAGIN CORPORATION FED CORPORATION
------------------ ---------------
Period from
Six-Months January 1, 2000 Six-Months inception
ended through Ended (January 6, 1992)
June 30, 2000 March 15, 2000 June 30, 1999 to March 15, 2000
------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,988,894) $ (5,745,452) $ (6,626,914) $ (44,893,450)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization 7,824,209 325,095 858,157 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 for stock-based compensation 4,675,859 -- -- --
Non-cash charge related to issuance of warrants 3,880,756 -- -- 203,000
Non-cash charge due to beneficial conversion feature -- -- -- 157,500
Changes in operating assets and liabilities--
Contract receivables 114,697 (58,659) (332,917) (131,963)
Unbilled costs and estimated profits on contracts
in progress (688,829) (397,841) 3,167,929 (619,564)
Prepaid expenses and other current assets (43,403) (170,780) 28,868 (6,130)
Accounts payable, accrued expenses and other
current liabilities (705,896) 440,382 (428,874) 2,550,979
------------- --------------- ------------- -----------------
Net cash used in operating activities (4,931,501) (2,666,916) (3,333,751) (32,821,408)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (443,447) (57,574) (48,444) (3,212,214)
Net proceeds from acquisition 996,017 -- -- (547,503)
Proceeds from the sale of assets -- -- -- (229,550)
------------- --------------- ------------- -----------------
Net cash provided by (used in)
investing activities 552,570 (57,574) (48,444) (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 21,474,915 1,269,378 7,089 4,688,538
Proceeds from sales of preferred stock, net of
issuance costs -- -- 2,925,823 23,856,998
Payment of short term debt -- 2,103,290 -- 5,436,623
(Net payments on) proceeds from long term debt
and capital leases (2,124,427) (62,629) 612,501 (295,526)
------------- --------------- ------------- -----------------
Net cash provided by financing activities 19,350,488 3,310,039 3,545,413 37,655,592
------------- --------------- ------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,971,557 585,549 163,218 1,304,017
CASH AND CASH EQUIVALENTS, beginning of period -- 718,468 1,878,286 --
------------- --------------- ------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 14,971,557 $ 1,304,017 $ 2,041,504 $ 1,304,017
============= =============== ============= =================
</TABLE>
See selected notes to financial statements.
4
<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 June 30, 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 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 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 was approximately $81.6 million, including $73.4 million of
value relating to the shares issued (at a fair value of $7 per share, the value
of the 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. 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 June 30, 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
5
<PAGE>
acquired and liabilities assumed by FDC. Considering that FED was a
development stage entity at the time of the merger, and had 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. In its preliminary
allocation of purchase price, the Company recorded goodwill of approximately
$78.5 million, which is being amortized over an estimated useful life of three
years. For the six-month period ended June 30, 2000, eMagin recorded
approximately $7.6 million in amortization expense relating to goodwill.
Note 4 - REVENUE RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both fixed-price contracts and cost-type contracts,
including some cost-plus-fee contracts. Revenues relating to 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 profit
based on the relationship of costs and the allocation of allowable indirect
costs as defined by each contract.
As of June 30, 2000, the Company has received advance payments on contracts to
be completed of $550,000 under an agreement for certain research and development
to be completed with another party. Through June 30, 2000, the Company had not
yet commenced its performance of services under this agreement and, accordingly,
no revenue has been recognized in the accompanying consolidated financial
statements.
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such 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 6 - 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 7 - 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, all of which were fully vested at the time
of the repricing. Subsequent to the repricing, these options are required to be
accounted for under variable plan accounting for the remainder of their terms,
or until such time that the options are exercised or otherwise forfeited. During
the quarter ended June 30, 2000, the Company recorded a benefit against
previously recorded compensation expense of approximately $2.6 million due to a
decrease in the fair market value of the Company's common stock during the
second quarter. During the quarter
6
<PAGE>
ended March 31, 2000, the Company had recorded compensation expense of
approximately $6.2 million based on the fair market value of the Company's
common stock at the end of the quarter, as compared to the new exercise price
of these options.
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
one-time non-cash charge of approximately $1.2 million in March 2000, which is
included in the accompanying consolidated statement of operations for the
six-month period ended June 30, 2000.
In March 2000, the Company issued approximately 2.5 million 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, deferred compensation expense in the amount of
approximately $13.1 million as a component of shareholders equity, of which
approximately $1.2 million was amortized into the statement of operations
during the six-month period ended June 30, 2000. The remaining balance will
be amortized over the vesting period of the options.
Certain of the Company's option and warrant holders were required to execute
lock-up agreements at the time of Merger (the "Lock Up Agreements") that
prohibit any disposition of the underlying shares for a period of 18 months
following the Merger, along with certain other provisions as set forth in the
Lock Up Agreements. In March 2000, the Company issued warrants to shareholders
(non-employees). The warrants were issued 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 six-month
period ended June 30, 2000.
Note 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued 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 its results of operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1999
STATEMENT OF FORWARD-LOOKING INFORMATION
This report 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 from those in
the forward-looking statements as a result of various important factors.
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
release.
The inclusion of the forward-looking statements should not be regarded as
a representation by the Company, or any other person, that such
forward-looking statements will be achieved. 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. 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 (the "Company") 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 was originally incorporated as Fashion Dynamics Corporation ("FDC")
on January 23, 1996 under the laws of the State of Nevada. For the past three
years, FDC had no active business operations, and sought to acquire an interest
in a business with long-term growth potential. On March 16, 2000, the Company
acquired FED Corporation through the merger of its wholly-owned subsidiary, FED
Capital Acquisition Corporation, with and into FED Corporation (the "Merger").
In connection with the Merger, the Company changed its name to eMagin
Corporation (derived from "electronic imaging"), and listed its securities on
the American Stock Exchange.
The 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. The total preliminary purchase price of the transaction is
approximately $81.6 million, including $73.4 million of value relating to the
shares issued (at a fair value of $7 per share, the value of the 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. 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 June 30, 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 the Company. Considering that FED
Corporation was a development stage entity at the time of the merger, and had
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. In its
preliminary allocation of purchase price the Company recorded goodwill of
approximately $78.5 million, which is being amortized over an estimated useful
life of three years. For the six-month period ended June 30, 2000, the Company
recorded approximately $7.6 million in amortization expense relating 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 $13.0 million in government contracts to support field
emission display technology development.
In 1994, FED Corporation relocated its operations to IBM's East Fishkill, NY
campus, purchased equipment for manufacturing and research and development. In
1996, FED Corporation began work related to the manufacturing and design of
microdisplays based upon Kodak's small molecule, OLED technology and, in 1997
FED Corporation acquired a license from Kodak to commercialize this technology.
Since 1997, FED Corporation 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. As of June 30, 2000, eMagin Corporation's patent portfolio
consists of 46 issued patents, 2 notices of allowance and 61 patents pending
relating to OLED, field emission displays, optics and potential system
implementation.
In April 1998 FED Corporation acquired Virtual Vision, Inc. for the purpose of
accelerating the emergence of a commercial market for video headsets. This
acquisition provided FED Corporation with a second core competency in advanced
optics that complements its expertise in semiconductor and display technology.
In 1998 FED Corporation 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.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1999.
Prior to the acquisition of FED Corporation, the Company was a shell with no
operations. As a result, management believes that the aggregation of the
financial results of the operating entity (FED Corporation) provides the most
meaningful comparative information to the reader. Accordingly, the following
comparative information effects the operating results for 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 June 30, 2000 reflects pro forma results of eMagin for the
six months ended June 30, 2000 and its predecessor, FED Corporation for the
period January 1, 2000 to March 15, 2000, on a combined basis, such that the
amounts presented and discussed reflect the full six 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.
REVENUES
Revenues for the three and six months ended June 30, 2000 were $0.8 million and
$1.4 million, respectively, as compared to $0.4 million and $1.1 million,
respectively, for the three and six months ended June 30, 1999. 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 remains subject to
unpredictable government funding issues.
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COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT
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, has received cost sharing awards from certain
U.S. government agencies to fund certain research and development. As of June
30, 2000, the remaining costs to be incurred and billed on these three active
"cost sharing" contracts totaled $2.3 million. Gross research and development
expenses for the three months ended June 30, 2000 were $3.3 million and $6.7
million for the six-months ended June 30, 2000 and for the same periods in
1999, the Company's gross research and development expenses were $2.5 million
and $5.7 million, respectively. Of these amounts, the Company received $0.6
million and $1.2 million in cost sharing from the U.S. Government for the
three months and six months ended June 30, 2000 and $0.4 million and $0.6
million for the same periods in 1999, respectively. The $0.8 million and $0.9
million increase in gross expenses for the three months and six months ended
June 30, 2000 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
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. Selling, general and administrative expenses, for the
three and six months ending June 30, 2000 were $1.5 million and $2.3 million
respectively, as compared to $1.1 million and $1.9 million, respectively, for
the three and six months ended June 30, 1999. The increase in selling, general
and administrative expenses is primarily due to increases in marketing
activity, personnel costs, travel and patent filings.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the three and six months ending June
30, 2000 were $6.5 million and $7.6 million respectively, as compared to $0.3
million and $0.6 million, respectively, for the three and six months ended June
30, 1999. The increase in depreciation and amortization expense is caused by
non-cash charges related to the amortization of goodwill created by the Merger.
NON-CASH FOR STOCK-BASED COMPENSATION
Non-cash for stock-based compensation expense for the three and six months
ending June 30, 2000 were $(1.7) million and $4.8 million respectively, as
compared to no activity for the three and six months ended June 30, 1999. During
the quarter ended June 30, 2000, the Company recorded a benefit against
previously recorded compensation expense of approximately $2.6 million due to a
decrease in the fair market value of the Company's common stock during the
second quarter. The remainder of the activity, for the three and six months
ending June 30, 2000, reflects the amortization of deferred compensation costs.
NON-CASH CHARGE RELATED TO ISSUANCE OF WARRANTS
Non-cash charge related to issuance of warrants expense for six months ending
June 30, 2000 were $3.9 million, as compared to no activity for the six months
ended June 30, 1999. Non-cash consulting expense associated with repricing
214,946 warrants that had been previously issued to consultants of the Company
represented $1.3 million. An additional $2.6 million related to the non-cash
expense associated with the issuance of 454,760 warrants,
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issued to former FED Corporation shareholders, prior to the Merger, that
agreed to the Lock Up Agreements.
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 $4.9 million for the six months
ended June 30, 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 $0.6 for the six months ended
June 30, 2000. This represented cash acquired net of acquisition cost of $1.0
million, offset by capital expenditures of $0.4.
Net cash provided by financing activities was $19.3 for the six months ended
June 30, 2000 and consisted primarily of proceeds from the issuance of common
stock in a private placement net of issuance costs of $21.5 million offset by
decreases in short term debt and capital leases. As of June 30, 2000, we had
$15.0 million in cash and cash equivalents.
RISK FACTORS THAT MAY AFFECT 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.
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.
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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.
PRODUCT LIABILITY
The Company's business exposes it go 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
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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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2000, we issued 1,080 shares of our common stock to Ward Parkinsen
upon Mr. Parkinsen's exercise of warrants to purchase common shares. We
received gross proceeds in the amount of $1,836.00, which proceeds are to be
used for general operating capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- --------------------------------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
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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: August 14, 2000 By: /s/ Edward V. Flynn
-------------------------------------
Edward V. Flynn
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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