UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment #1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MARCH 15,2000
--------------------
EMAGIN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Nevada 000-24757 88-0378451
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
1580 Route 52, Hopewell Junction, New York 12533
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 892-1900
--------------
Fashion Dynamics Corporation, 1177 West Hastings Street Suite 2000
Vancouver, BC V6E 2K3
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Item 1. Change in Control of Registrant.
On March 15, 2000, FED Capital Acquisition Corporation, a Delaware
corporation ("Merger-Sub"), a wholly-owned subsidiary of eMagin Corporation, a
Nevada corporation (the "Company"), merged (the "Merger") with and into FED
Corporation, a Delaware corporation ("FED"), pursuant to an Agreement and Plan
of Merger dated March 13, 2000 (the "Merger Agreement"). FED is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. Following the Merger, the business to be conducted by the Company will
be the business conducted by FED prior to the Merger. In conjunction with the
Merger, the Company changed its name from "Fashion Dynamics Corp." to "eMagin
Corporation."
Pursuant to the terms of the Merger Agreement, the Company issued
10,366,000 shares of its authorized but unissued common stock to the former
holders of FED common stock and securities convertible into common stock based
on a conversion ratio of two (2) shares of the Company's common stock for each
share of FED common stock issued and outstanding (or issuable upon conversion or
exercise of existing FED securities) as of the effective time of the Merger. The
shares issued to the former FED stockholders represents approximately 39% of the
outstanding common stock of the Company following the Merger.
All outstanding options to purchase FED common stock were converted
into options to purchase common stock of the Company. FED employee stock options
to purchase an aggregate of 1,634,058 shares of FED Common Stock were converted
into options to purchase 3,268,116 shares of the Company's Common Stock as
follows: (i) 2,376,360 shares of Company Common Stock at an exercise price of
$1.70 per share vesting over 48 months from the date of the Merger; (ii) 42,240
shares of Company Common Stock at an exercise price of $1.70 per share vesting
over 12 months from the date of the Merger, and (iii) 849,516 shares of Company
Common Stock at an average exercise price of $7.59 per share, vesting according
to various schedules.
Immediately prior to the Merger, The Travelers Insurance Company
("Travelers") held approximately 19% of FED's voting equity securities on a
fully diluted basis. In connection with the Offering described in Item 5 below,
Travelers purchased from the Company 1,083,333 shares of Company Common Stock
for an aggregate purchase price of $7,583,333. In addition, prior to the Merger
Travelers purchased 4,357,843 shares of Company Common Stock from existing
stockholders in privately negotiated transactions. Following consummation of the
Merger and after giving effect to the foregoing purchases, Travelers holds
approximately 25% of the outstanding common stock of the Company on a
fully-diluted basis. All shares held by Travelers and its affiliates will bear a
restrictive legend under the Securities Act of 1933. Prior to the Merger, Jack
L. Rivkin, Senior Vice President of The Travelers Investment Group, was as a
member of the board of directors of FED. Pursuant to the terms of the Merger
Agreement, Mr. Rivkin was appointed to serve on the board of directors of the
Company.
Item 2. Acquisition or Disposition of Assets.
See Item 1 above for a description of the Merger.
Item 5. Other Events.
In connection with the Merger, the Company changed its name to "eMagin
Corporation" and it also issued 3,464,547 shares of its Common Stock pursuant to
Rule 506 under the Securities Act of 1933, as amended, for an aggregate purchase
price of $24,251,830 (the "Offering").
Also in connection with the Merger, Yiu Joe Cheung resigned as the
director of the Company and Gary Jones, N. Damodar Reddy, Ajmal Khan, and Jack
Rivkin were appointed as directors to fill vacancies on the Board of Directors,
to serve in such capacity until the next annual meeting of shareholders of the
Company or until their earlier resignation or removal.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
a) Financial Statements of FED Corporation
The following Audited Financial Statements of FED Corporation
are filed on the pages listed below:
Report of Independent Public Accountants.................. F-1
Consolidated Balance Sheets as of December 31, 1999
and 1998................................................ F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997 and the Period
from Inception (January 6, 1992) to December 31, 1999... F-3
Consolidated Statements of Shareholders' Equity for the
Period from Inception (January 6, 1992) to December 31,
1992 and for Each of the Seven Years Ended December 31,
1999..................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 and for the Period From
Inception (January 6, 1992) to December 31, 1999......... F-6
b) Pro Forma Financial Information
The following required pro forma financial information of
Fashion Dynamics and FED Corporation is filed on the pages
listed below:
Pro Forma Balance Sheet--Assets as of December 31, 1999
(unaudited).............................................. F-21
Pro Forma Balance Sheet--Liabilities and Shareholders
Equity as of December 31, 1999 (unaudited)............... F-22
Pro Forma Statement of Operations for the Year Ended
December 31, 1999 (unaudited)............................ F-23
EXHIBIT LIST.
2.1 Agreement and Plan of Merger(1)
4.1 Articles of Incorporation of the Company (previously filed as
an exhibit to Form 10-SB on 5/25/99).
4.2 Amendment to Articles of Incorporation of Company
changing name to "eMagin Corporation."
- --------
(1) The Company undertakes to file supplementally a copy of any schedule to the
Agreement and Plan of Merger to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eMAGIN CORPORATION
/s/ Edward Flynn
--------------------------------
Title: Chief Financial Officer
Dated: March 15, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of FED Corporation:
We have audited the accompanying consolidated balance sheets of FED Corporation
(a Delaware corporation in the development stage - Note 1) and subsidiary as of
December 31, 1999 and 1998, and the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1999, and for the period from inception (January 6, 1992) to
December 31, 1999 and the consolidated statements of shareholders' equity for
the period from inception (January 6, 1992) to December 31, 1992 and for each of
the seven years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FED Corporation and subsidiary
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999,
and for the period from inception (January 6, 1992) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
New York, New York
February 14, 2000 (except for Note 3,
as to which the date is March 15, 2000)
F-1
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
------ --------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 718,468 $ 1,878,286
Contract receivables 73,304 262,059
Costs and estimated profits in excess of billings on contracts in progress 221,723 3,290,731
Prepaid expenses and other current assets 127,658 257,498
--------------- ---------------
Total current assets 1,141,153 5,688,574
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,214,680 1,774,816
GOODWILL, net 2,671,390 3,595,356
DEPOSITS AND OTHER ASSETS 10,451 104,449
--------------- ---------------
Total assets $ 5,037,674 $ 11,163,195
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ --------------- ---------------
CURRENT LIABILITIES:
Accounts payable $ 683,237 $ 457,423
Accrued payroll and benefits 1,100,958 952,525
Other accrued expenses 256,905 598,502
Advance payments on contracts to be completed - 246,518
Short-term debt 2,126,700 -
Current portion of long-term debt 268,675 62,234
--------------- ---------------
Total current liabilities 4,436,475 2,317,202
--------------- ---------------
SENIOR NOTES PAYABLE - 4,000,000
--------------- ---------------
LONG-TERM DEBT 541,578 153,276
--------------- ---------------
COMMITMENTS (Note 11)
SHAREHOLDERS' EQUITY:
Cumulative preferred stock, Series A, $.01 par value, 1,466,663 shares
authorized, -0- and 133,333 issued and outstanding, respectively
(liquidation preference of $1.50 per share plus accrued but unpaid
dividends) - 1,333
Noncumulative preferred stock, Series B, $.01 par value, 1,000,000 shares
authorized, -0- and 14,494 issued and outstanding, respectively
(liquidation preference of $4.00 per share plus accrued but unpaid
dividends) - 146
Noncumulative preferred stock, Series C, $.01 par value, 4,812,500 shares
authorized, -0- and 1,156,832 issued and outstanding, respectively
(liquidation preference of $3.50 per share plus accrued but unpaid
dividends) - 11,568
Noncumulative preferred stock, Series D, $.01 par value, 2,388,750 shares
authorized, -0- and 887,304 issued and outstanding, respectively
(liquidation preference of $5.00 per share plus accrued but unpaid
dividends) - 8,873
Noncumulative preferred stock, Series E, $.01 par value, 1,067,500 shares
authorized, -0- and 874,093 issued and outstanding, respectively
(liquidation preference of $6.00 per share plus accrued but unpaid
dividends) - 8,741
Noncumulative preferred stock, Series F, $.01 par value, 4,000,000 shares
authorized, -0- and 1,922,771 issued and outstanding, respectively
(liquidation preference of $6.00 per share plus accrued but unpaid
dividends) - 19,228
Common stock, $.01 par value, 40,000,000 and 20,000,000 shares authorized,
4,380,589 and 5,458,126 shares issued and outstanding, respectively 43,806 54,581
Additional paid-in capital 47,254,459 28,029,950
Deficit accumulated during the development stage (47,238,644) (23,441,703)
--------------- ---------------
Total shareholders' equity 59,621 4,692,717
--------------- ---------------
Total liabilities and shareholders' equity $ 5,037,674 $ 11,163,195
=============== ===============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
and the Period From Inception (January 6, 1992) to December 31, 1999
Period From
Inception
(January 6, 1992)
Year Ended December 31 to December 31,
------------------------------------------------
1999 1998 1997 1999
---------------- -------------- -------------- --------------
CONTRACT REVENUES $ 1,895,426 $ 6,154,123 $ 3,626,326 $ 14,565,353
---------------- -------------- -------------- --------------
Total revenues 1,895,426 6,154,123 3,626,326 14,565,353
---------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$1,148,166, $1,263,448 and $2,744,865,
respectively 10,171,387 10,250,010 5,433,591 36,323,800
General and administrative 5,203,201 3,513,662 1,980,797 15,069,058
Noncash charge for induced conversion of debt 1,917,391 - - 1,917,391
---------------- -------------- -------------- -----------------
Total costs and expenses, net 17,291,979 13,763,672 7,414,388 53,310,249
---------------- -------------- -------------- -----------------
OTHER INCOME (EXPENSE):
Interest expense (507,900) (207,032) (200,000) (1,263,827)
Interest income 104,208 85,154 258,494 860,725
---------------- -------------- -------------- -----------------
Total other income (expense) (403,692) (121,878) 58,494 (403,102)
---------------- -------------- -------------- -----------------
Loss before provision for income
taxes (15,800,245) (7,731,427) (3,729,568) (39,147,998)
PROVISION FOR INCOME TAXES - - - -
---------------- -------------- -------------- ----------------
Net loss $(15,800,245) $(7,731,427) $(3,729,568) $(39,147,998)
================= =============== =============== ==================
The accompanying notes are an integral part of these consolidated statements.
F-3
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Shareholders' Equity
For the Period From Inception (January 6, 1992) to December 31, 1992 and for
Each of the Seven Years Ended December 31, 1999
Series A Series B Series C Series D Series E
------------------ ------------------ ------------------- ----------------- ----------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------ ------------------ ------------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, at inception
(January 6, 1992) - $ - - $ - - $ - - $ - - $ -
Sale of common stock to founder - - - - - - - - - -
Sale of common stock to a trust
controlled by founder - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1992 - - - - - - - - - -
Sale of common stock to founder - - - - - - - - - -
Sale of common stock to founder's
family - - - - - - - - - -
Repurchase of common stock from
founder - - - - - - - - - -
Sale of Series A preferred stock 2,000 20 - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1993 2,000 20 - - - - - - - -
Sale of common stock to founder - - - - - - - - - -
Sale of Series B preferred stock - - 10,154 102 - - - - - -
Sales of common stock - - - - - - - - - -
Sales of common stock to employees - - - - - - - - - -
Sales of common stock to employees
and ESPP - - - - - - - - - -
Stock purchases receivable from
employees - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1994 2,000 20 10,154 102 - - - - - -
Sales of common stock, net of
stock issuance costs - - - - - - - - - -
Common stock issued to Director
as finder's fee - - - - - - - - - -
Sales of common stock to employees
and ESPP - - - - - - - - - -
Receipt of stock purchases
receivable from employees - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1995 2,000 20 10,154 102 - - - - - -
Conversion of Series A preferred
stock 131,333 1,313 - - - - - - - -
Common stock issued as finder's
fee - - - - - - - - - -
Sale of common stock to employees
and ESPP - - - - - - - - - -
Exercise of stock options - - - - - - - - - -
Sale of Series B preferred stock - - 1,562 16 - - - - - -
Sale of Series C preferred stock - - - - 1,156,832 11,568 - - - -
Sale of Series D preferred stock - - - - - - 887,304 8,873 - -
Sale of Series E preferred stock - - - - - - - - 874,093 8,741
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1996 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741
Series F Series G
--------------------- ---------------------
Preferred Stock Preferred Stock Common Stock
--------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, at inception (January 6, 1992) $ - - $ - - $ -
Sale of common stock to founder - - - - 5,000,000 50,000
Sale of common stock to a trust
controlled by founder - - - - 161,000 1,610
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1992 - - - - 5,161,000 51,610
Sale of common stock to founder - - - - 76,000 760
Sale of common stock to founder's family - - - - 13,333 133
Repurchase of common stock from founder - - - - (1,600,000) (16,000)
Sale of Series A preferred stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1993 - - - - 3,650,333 36,503
Sale of common stock to founder - - - - 100 1
Sale of Series B preferred stock - - - - - -
Sales of common stock - - - - 1,047,132 10,471
Sales of common stock to employees - - - - 88,469 885
Sales of common stock to employees and
ESPP - - - - 34,041 340
Stock purchases receivable from employees - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1994 - - - - 4,820,075 48,200
Sales of common stock, net of stock
issuance costs - - - - 460,000 4,600
Common stock issued to Director as
finder's fee - - - - 61,560 616
Sales of common stock to employees and
ESPP - - - - 33,295 333
Receipt of stock purchases receivable
from employees - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 - - - - 5,374,930 53,749
Conversion of Series A preferred stock - - - - - -
Common stock issued as finder's fee - - - - 11,500 115
Sale of common stock to employees and ESPP - - - - 42,447 424
Exercise of stock options - - - - 3,125 31
Sale of Series B preferred stock - - - - - -
Sale of Series C preferred stock - - - - - -
Sale of Series D preferred stock - - - - - -
Sale of Series E preferred stock - - - - - -
Costs of private placement of preferred
stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 - - - - 5,432,002 54,319
Deficit
Accumulated
Additional During the
Paid-in Development Subscription
Capital Stage Receivables Total
------------ ------------- ------------- ------------
BALANCE, at inception (January 6, 1992) $ - $ - $ - $ -
Sale of common stock to founder (45,000) - - 5,000
Sale of common stock to a trust
controlled by founder 119,140 - - 120,750
Net loss for the period - (59,116) - (59,116)
------------ ------------- ------------- ------------
BALANCE, December 31, 1992 74,140 (59,116) - 66,634
Sale of common stock to founder 61,490 - - 62,250
Sale of common stock to founder's family 19,867 - - 20,000
Repurchase of common stock from founder 14,400 - - (1,600)
Sale of Series A preferred stock 199,980 - - 200,000
Dividends on Series A preferred stock - (3,750) - (3,750)
Net loss for the period - (408,738) - (408,738)
------------ ------------- ------------- ------------
BALANCE, December 31, 1993 369,877 (471,604) - (65,204)
Sale of common stock to founder - - - 1
Sale of Series B preferred stock 40,514 - - 40,616
Sales of common stock 1,591,786 - - 1,602,257
Sales of common stock to employees 133,110 - - 133,995
Sales of common stock to employees and
ESPP 43,062 - - 43,402
Stock purchases receivable from employees - - (26,810) (26,810)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (1,404,862) - (1,404,862)
------------ ------------- ------------- ------------
BALANCE, December 31, 1994 2,178,349 (1,894,466) (26,810) 305,395
Sales of common stock, net of stock
issuance costs 1,107,723 - - 1,112,323
Common stock issued to Director as
finder's fee 153,284 - - 153,900
Sales of common stock to employees and
ESPP 70,420 - - 70,753
Receipt of stock purchases receivable
from employees - - 26,810 26,810
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (3,992,375) - (3,992,375)
------------ ------------- ------------- ------------
BALANCE, December 31, 1995 3,509,776 (5,904,841) - (2,341,194)
Conversion of Series A preferred stock (1,313) - - -
Common stock issued as finder's fee (115) - - -
Sale of common stock to employees and ESPP 105,249 - - 105,673
Exercise of stock options 4,656 - - 4,687
Sale of Series B preferred stock 6,234 - - 6,250
Sale of Series C preferred stock 4,037,344 - - 4,048,912
Sale of Series D preferred stock 4,427,646 - - 4,436,519
Sale of Series E preferred stock 5,235,817 - - 5,244,558
Costs of private placement of preferred
stock (747,292) - - (747,292)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (6,021,867) - (6,021,867)
------------ ------------- ------------- ------------
BALANCE, December 31, 1996 16,578,002 (11,944,708) - 4,718,246
The accompanying notes are an integral part of these consolidated statements.
F-4
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Shareholders' Equity (Continued)
For the Period From Inception (January 6, 1992) to December 31, 1992
and for Each of the Seven Years Ended December 31, 1999
Series A Series B Series C Series D Series E
------------------- ------------------ ------------------- ----------------- ----------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------ ------------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1996 133,333 $ 1,333 11,716 $ 118 1,156,832 $ 11,568 887,304 $ 8,873 874,093 $ 8,741
Sale of common stock to employees
and ESPP - - - - - - - - - -
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1997 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741
Sale of common stock to employees
and ESPP - - - - - - - - - -
Exercise of stock options - - - - - - - - - -
Sale of Series B preferred stock - - 2,778 28 - - - - - -
Sale of Series F preferred stock - - - - - - - - - -
Costs of private placement of
preferred stock - - - - - - - - - -
Dividends on Series A preferred
stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1998 133,333 1,333 14,494 146 1,156,832 11,568 887,304 8,873 874,093 8,741
Sale of Series G preferred stock
and resulting accretion to
liquidation value - - - - - - - - - -
Dividend on Series A preferred
stock - - - - - - - - - -
Induced conversion of preferred
stock to common stock (133,333) (1,333) (14,494) (146)(1,156,832) (11,568)(887,304) (8,873)(874,093)(8,741)
Sale of common stock to employees
and ESPP - - - - - - - - - -
Common stock options and warrants
issued to nonemployees - - - - - - - - - -
Beneficial conversion feature
upon conversion of Debt - - - - - - - - - -
Stock split (Note 8) - - - - - - - - - -
Net loss for the period - - - - - - - - - -
-------- --------- -------- --------- ---------- -------- -------- -------- -------- -------
BALANCE, December 31, 1999 - $ - - $ - - $ - - $ - - $ -
======== ========= ======== ========= ========== ======== ======== ======== ======== =======
Series F Series G
---------------------- --------------------
Preferred Stock Preferred Stock Common Stock
---------------------- -------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1996 - $ - - $ - 5,432,002 $ 54,319
Sale of common stock to employees and ESPP - - - - 12,728 128
Costs of private placement of preferred
stock - - - - - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1997 - - - - 5,444,730 54,447
Sale of common stock to employees and ESPP - - - - 8,396 84
Exercise of stock options - - - - 5,000 50
Sale of Series B preferred stock - - - - - -
Sale of Series F preferred stock 1,915,471 19,155 - - - -
Costs of private placement of preferred - -
stock 7,300 73 - -
Dividends on Series A preferred stock - - - - - -
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1998 1,922,771 19,228 - - 5,458,126 54,581
Sale of Series G preferred stock and
resulting accretion to liquidation
value - - 681,446 6,814 - -
Dividend on Series A preferred stock - - - - - -
Induced conversion of preferred stock to
common stock (1,922,771) (19,228)(681,446) (6,814) 25,197,315 251,973
Sale of common stock to employees and ESPP - - - - 8,326 83
Common stock options and warrants issued
to nonemployees - - - - - -
Beneficial conversion feature
upon conversion of Debt - - - - - -
Stock split (Note 8) - - - - (26,283,178) (262,831)
Net loss for the period - - - - - -
---------- ---------- --------- ---------- ---------- ----------
BALANCE, December 31, 1999 - $ - - $ - 4,380,589 $ 43,806
========== ======== ========= ========== ========== ===========
Accumulated
Additional During the
Paid-in Development Subscription
Capital Stage Receivables Total
------------ ------------- ------------- ------------
BALANCE, December 31, 1996 $ 16,578,002 $ (11,944,708) $ - $ 4,718,246
Sale of common stock to employees and ESPP 53,246 - - 53,374
Costs of private placement of preferred
stock (7,830) - - (7,830)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (3,729,568) - (3,729,568)
------------ ------------- ------------- ------------
BALANCE, December 31, 1997 16,623,418 (15,692,276) - 1,016,222
Sale of common stock to employees and ESPP 38,311 - - 38,395
Exercise of stock options 12,450 - - 12,500
Sale of Series B preferred stock 16,638 - - 16,666
Sale of Series F preferred stock 11,473,671 - - 11,492,826
Costs of private placement of preferred
stock (134,538) - - (134,465)
Dividends on Series A preferred stock - (18,000) - (18,000)
Net loss for the period - (7,731,427) - (7,731,427)
------------ ------------- ------------- ------------
BALANCE, December 31, 1998 28,029,950 (23,441,703) - 4,692,717
Sale of Series G preferred stock and
resulting accretion to liquidation
value 4,702,817 (957,185) - 3,752,446
Dividend on Series A preferred stock - (9,000) - (9,000)
Induced conversion of preferred stock to
common stock 12,676,004 (7,030,511) - 5,840,763
Sale of common stock to employees and ESPP 15,524 - - 15,607
Common stock options and warrants issued
to nonemployees 234,000 - - 234,000
Beneficial conversion feature
upon conversion of Debt 1,333,333 - - 1,333,333
Stock split (Note 8) 262,831 - - -
Net loss for the period - (15,800,245) - (15,800,245)
------------ ------------- ------------- ------------
BALANCE, December 31, 1999 $ 47,254,459 $ (47,238,644) $ - $ 59,621
============ ============= ========== ============
The accompanying notes are an integral part of these consolidated statements.
F-5
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 and for the Period From
Inception (January 6, 1992) to December 31, 1999
Period from Inception
Year Ended December 31 (January 6, 1992)
-------------------------------------------------
1999 1998 1997 to December 31, 1999
--------------- -------------- -------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,800,245) $ (7,731,427) $ (3,729,568) $ (39,147,998)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 1,625,081 1,652,715 456,525 4,804,920
Deferred rent - (167,446) (28,894) -
Gain on sale of assets - - - (69,525)
Noncash charge for induced conversion
of debt 1,917,391 - - 1,917,391
Noncash charges for value of warrants
granted and amortization of original
issue discount 203,000 - - 203,000
Noncash charge due to beneficial
conversion feature 157,500 - - 157,500
Changes in operating assets and
liabilities-
Contract receivables 188,755 1,723,189 (1,619,680) (73,304)
Costs and estimated profits in excess
of billings on contracts in progress 3,069,008 (3,220,079) (70,652) (221,723)
Prepaid expenses and other current assets 129,840 214,738 (15,153) 140,779
Deposits and other assets 23,871 628,756 (628,756) 23,871
Accounts payable 205,981 (81,838) 374,361 728,914
Accrued payroll and benefits 172,778 75,094 141,790 1,011,426
Other accrued expenses (247,847) 340,008 87,568 370,257
Advance payments on contracts to be
completed (246,518) 246,518 - -
--------------- -------------- -------------- ---------------------
Net cash used in operating
activities (8,601,205) (6,319,772) (5,032,459) (30,154,492)
--------------- -------------- -------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (250,193) (688,042) (879,049) (3,154,640)
Acquisition of business, net of cash acquired - (547,503) - (547,503)
Proceeds from the sale of assets - - - 229,550
--------------- -------------- -------------- ---------------------
Net cash used in investing
activities (250,193) (1,235,545) (879,049) (3,472,593)
--------------- -------------- -------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes, net of issuance
costs - - - 3,968,958
Proceeds from short-term debt 3,333,333 - - 3,333,333
Proceeds from notes payable 590,232 - - 590,232
Proceeds from sales of common stock, net of
issuance costs 15,608 40,208 53,246 3,419,160
Proceeds from sales of preferred stock, net
of issuance costs 3,752,407 6,875,028 - 23,856,998
Payments of obligations under capital lease - - (327,162) (823,128)
--------------- -------------- -------------- ---------------------
Net cash provided by (used in)
financing activities 7,691,580 6,915,236 (273,916) 34,345,553
--------------- -------------- -------------- ---------------------
Net (decrease) increase in cash
and cash equivalents (1,159,818) (640,081) (6,185,424) 718,468
CASH AND CASH EQUIVALENTS, beginning of period 1,878,286 2,518,367 8,703,791 -
--------------- -------------- -------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 718,468 $ 1,878,286 $ 2,518,367 $ 718,468
=============== ============== ============== =====================
The accompanying notes are an integral part of these consolidated statements.
F-6
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
(Continued) For the Years Ended December 31, 1999, 1998 and 1997 and for
the Period From Inception (January 6, 1992) to December 31, 1999
Period from Inception
Year Ended December 31 (January 6, 1992)
------------------------------------------------
1999 1998 1997 to December 31, 1999
-------------- -------------- ------------- ---------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 242,000 $ 200,000 $ 214,005 $ 930,593
============== ============== ============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to common stock $ 7,576,862 $ - $ -
============== ============== =============
Conversion of senior debt to common stock $ 4,000,000 $ - - $ -
============== ============== =============
ACQUISITION OF BUSINESS:
Fair value of assets acquired, net of cash acquired $ - $ 978,399 $ -
Liabilities assumed - (165,163) -
Excess purchase price over net assets acquired - 4,234,267 -
Value of preferred stock issued - (4,500,000) -
-------------- ---------- -------------
Net cash paid for acquisition $ - $ 547,503 $ -
============== ============== =============
The accompanying notes are an integral part of these consolidated statements.
F-7
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. NATURE OF BUSINESS AND
DEVELOPMENT STAGE RISKS
FED Corporation ("FED", together with its subsidiary the "Company") was formed
on January 6, 1992, to develop, manufacture and market field emitter devices or
flat panel displays. In January 1994, the Company moved its principal office
from North Carolina to New York State. In connection with this move, a Delaware
corporation was established and the North Carolina Corporation was statutorily
merged into the Delaware corporation with the latter being the survivor. During
1998, FED acquired Virtual Vision, Inc. ("Virtual Vision," or the "Subsidiary"),
a head-mounted display technology company. Virtual Vision develops and markets
head-mounted display systems for standalone and wireless computing in
commercial, industrial, and military applications.
The Company continues to be a development stage company, as defined by Statement
of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises", as it continues to devote substantially all of
its efforts to establishing a new business, and it has not yet commenced its
planned principal operations. Revenues earned by the Company to date are
primarily related to research and development type contracts and are not related
to the Company's planned principal operations of the commercialization of
products using OLED technology.
Since inception, the Company has entered into research and development
cost-sharing arrangements, as well as research and development contracts, with
several government agencies and private industry. To date, such arrangements
have provided total funding of approximately $24.6 million through cost sharing
arrangements and contract revenues. Certain of these arrangements continue
through 2001 and provide for approximately $9.4 million of additional funding.
Such funding is subject to, among other factors, satisfactory progress on
projects and available government funding.
Through December 31, 1999, the Company had incurred development stage losses
totaling approximately $39 million, and at December 31, 1999, had a total
shareholders' deficit of $1.1 million and a working capital deficit of $4.5
million. The Company's future success is dependent upon its ability to continue
to raise capital for, among other things, (1) its research and development
efforts, (2) hiring and retaining key employees, (3) satisfaction of its
commitments and (4) the successful development and marketing of its products.
The Company believes that its remaining cash resources at year-end, together
with the proceeds resulting from the merger (Note 3), will be sufficient to fund
the Company's operations through the first quarter of 2001 and beyond.
However, there can be no assurance that the Company's efforts to produce a
commercially viable product will be successful, that the Company will generate
sufficient revenues to provide positive cash flows from operations or that
additional capital will be available, if required, to permit the Company to
realize its plans.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract.
F-8
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
As of December 31, 1998, the Company had received advance payments on contracts
to be completed of $246,518. At December 31, 1999, such amounts were minimal.
COSTS AND ESTIMATED PROFITS IN EXCESS OF
BILLINGS ON CONTRACTS IN PROGRESS
The Company records costs and estimated profits in excess of billings on
contracts in progress as an asset on its balance sheet to the extent such costs,
and related profits, if any, have been incurred under outstanding contracts and
are expected to be collected.
The components of costs and estimated profits in excess of billings on contracts
in progress as of December 31, 1999 and 1998 were as follows:
1999 1998
--------------- ---------------
Total costs incurred and estimated profits $ 1,216,000 $ 8,415,000
Less amounts billed 994,000 5,115,000
--------------- ---------------
Costs and estimated profits in excess of
billings on contracts in progress $ 222,000 $ 3,300,000
=============== ===============
RESEARCH AND DEVELOPMENT/
COST SHARING ARRANGEMENTS
To date, activities of the Company include the performance of research and
development under cooperative agreements with United States Government agencies.
Current industry practices provide that costs and related funding under such
agreements be accounted for as incurred and earned.
The Company has entered into three cost sharing arrangements with an agency of
the U.S. Government. The Company has incurred research and development costs and
earned funding under these agreements as follows:
1999 1998 1997
-------------- --------------- ---------------
Unfunded research and development $ 8,997,000 $ 8,726,000 $ 2,869,000
Research and development costs 2,322,000 2,787,000 5,310,000
Funding received (1,148,000) (1,263,000) (2,745,000)
-------------- --------------- ---------------
$ 10,171,000 $ 10,250,000 $ 5,434,000
============== =============== ===============
Although it is not under any obligation to do so, the Company may incur
approximately $6,700,000 of additional costs relating to these efforts. If such
costs, as defined in the related agreements, are incurred, the government is
obligated to reimburse the Company for $3,326,000 of such costs.
F-9
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist primarily
of overnight commercial paper and are stated at cost, which approximates market,
and are considered available for sale.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires the classification of debt and equity securities based on
whether the securities will be held to maturity, are considered trading
securities or are available-for-sale. Classification within these categories may
require the securities to be reported at their fair market value with unrealized
gains and losses included either in current earnings or reported as a separate
component of shareholders' equity, depending on the ultimate classification.
COMPREHENSIVE INCOME
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains or losses on
securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial
statements. The Company's operations did not give rise to any material items
includable in comprehensive income which were not already in net income for the
years ended December 31, 1999, 1998 and 1997. Accordingly, the Company's
comprehensive income is the same as its net income for all period presented.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over
their estimated useful lives. Amortization of leasehold improvements is
calculated by using the straight-line method over the shorter of their estimated
useful lives or lease terms. Expenditures for maintenance and repairs are
charged to expense as incurred.
GOODWILL
Excess purchase price over net assets acquired ("goodwill") is amortized on a
straight-line basis over the estimated period of benefit of the business
acquired. Goodwill related to the acquisition of Virtual Vision of approximately
$4,110,000, net of accumulated amortization of $1,439,000 at December 31, 1999,
is being amortized over a period of five years.
LONG-LIVED ASSETS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed," establishes financial accounting and
reporting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. SFAS No. 121 requires, among other
things, that assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
realizable considering, among other factors, expected future undiscounted
operating cash flows of the related asset.
F-10
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
INCOME TAXES
Deferred income taxes are recorded by applying enacted statutory tax rates to
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. At December 31, 1999, the Company
has net deferred tax assets of approximately $14.3 million, primarily resulting
from the future tax benefit of net operating loss carryforwards discussed below.
Such net deferred tax assets are fully offset by valuation allowances because of
the uncertainty as to their future realizability.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $35.8 million, which expire through 2019, available to offset
future taxable income. Pursuant to Section 382 of the Internal Revenue Code, the
usage of a portion of these net operating loss carryforwards is limited due to
changes in ownership that have occurred. Additionally, the transaction discussed
in Note 3, if consummated, will result in a further limitation of the use of
such net operating loss carryforwards.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25"), "Accounting for Stock Issued to Employees." The Company, as permitted,
elected not to adopt the financial reporting requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," for stock-based compensation granted
to employees. Accordingly, the Company has disclosed in the notes to the
financial statements the pro forma net loss for the periods presented as if the
fair-value-based method was used in accordance with the provisions of SFAS No.
123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the current
year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Boards issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability and
be measured at its fair value. Additionally, any changes in the derivative's
fair value are to be recognized currently in earnings, unless specific hedge
accounting criteria are met. This statement is effective for fiscal years
beginning after June 15, 2000. The Company does not believe that adoption of
this statement will have a material impact on its consolidated financial
statements.
F-11
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
3. MERGER
On March 15, 2000, the Company effected a merger (the "Merger") with and into a
publicly traded shell company (the "Issuer"). In connection with the Merger,
approximately $24,000,000 of gross proceeds were raised by the Issuer in a
private placement of equity securities. Upon consummation of the Merger in the
whole valued at approximately $79 million, approximately 5.2 million shares of
the Company's common stock and other equity securities, considered on a fully
diluted basis, were converted to 10,366,000 shares or approximately 35% of the
Issuer.
Prior to the consummation of the Merger, the Company reduced its number of
non-accredited investors to less than 35, such that this transaction shall be
exempt from filing with the Securities and Exchange Commission. In connection
with this effort, during February 2000 the Company purchased approximately
19,700 shares of common stock at an aggregate purchase price of $4.50 per share.
4. ACQUISITION OF VIRTUAL VISION
In March 1998, the Company acquired all of the outstanding stock of Virtual
Vision for a total purchase price of $5,000,000, consisting of $500,000 in cash
and 750,000 shares of the Company's Series F Preferred Stock valued at $6.00 per
share. The acquisition was accounted for under the purchase method of accounting
and the results of operations of Virtual Vision have been included in the
consolidated financial statements since the date of acquisition. The purchase
price was allocated based on the fair value of the assets acquired, determined
by management's estimates, as supported by appraisal. Purchase price in excess
of net assets acquired of approximately $4.1 million resulted in the
acquisition, which is being amortized over a period of five years. Pro forma
results of operations for the periods prior to the acquisition are not
materially different than the accompanying historical statements of operations
presented for the Company.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 1999 and 1998:
Useful
Lives 1999 1998
-------------- -------------- --------------
Computer equipment and software 3 $ 558,552 $ 530,088
Lab and factory equipment 3 3,142,186 3,022,441
Furniture, fixtures and office equipment 10 148,835 230,916
Leasehold improvements Life of lease 669,245 485,182
-------------- --------------
4,518,818 4,268,627
Less- Accumulated depreciation and amortization (3,304,138) (2,493,811)
-------------- --------------
$ 1,214,680 $ 1,774,816
============== ==============
Depreciation and amortization expense of equipment and leasehold improvements
for the years ended December 31, 1999, 1998 and 1997, amounted to approximately
$810,000, $1,026,000 and $435,000, respectively.
F-12
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Additionally, from time to time, the Company makes deposits on certain equipment
that may ultimately be purchased by a financing company and leased to the
Company. Amounts paid by the Company for such deposits totaled approximately
$14,000 and $1,840,000 for the years ended December 31, 1999 and 1998,
respectively. During 1998, certain equipment, on which the Company had made
deposits, was purchased by a financing company and the Company was reimbursed
for such deposits totaling approximately $2,469,000. These activities were not
material during 1999.
6. DEBT
SENIOR NOTES PAYABLE
In April 1995, the Company completed a private placement for the issuance and
sale of its 5% senior notes in the aggregate principal amount of $4,000,000,
which was to mature in full on April 12, 2002, at an interest rate of 5% per
annum payable quarterly. In July 1999, as part of the Company's recapitalization
(Note 8), the note was converted into 5,072,464 shares of the Company's common
stock. Under the original terms of the notes, the holders of the senior notes
had the right to convert the unpaid principal balance, in multiples of $1,000,
into common stock at the price of $3.45 per share at any time, subject to
provision for anti-dilution. In order to induce the noteholders to convert such
notes, the Company provided for a conversion rate of 4.375 shares of common
stock, for each share of common stock otherwise provided for under the original
conversion terms. The Company has recorded an expense of $1,917,000 in the
accompanying statement of operations for the year ended December 31, 1999 as a
result of the conversion, based on an estimated fair value of $3.40 per share,
the value of a common share based on the Merger discussed in Note 3.
BRIDGE LOANS
In September 1999, the Company entered into two $1,000,000 convertible loans
for an aggregate of $2,000,000. Each loan bears interest at 8% and matures in
June 2000. The loans are convertible at the option of the holder into shares
of the Company's common stock at a purchase price equal to the per share value
of the Company's most recent equity financing. In connection with these loans,
the Company issued warrants for the purchase of 167,000 shares of the
Company's common stock at an excise price of $12.00 per share. The intrinsic
value of these warrants of $140,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount will be amortized into interest expense over the
period of the debt.
In December 1999, the Company borrowed $1,333,333 from a corporation under
the terms of a convertible note. The note was convertible into 388,726 shares
of common stock under its original terms. The loan bears interest at 8%
annually and matures in May 2000. In connection with the Merger discussed in
Note 3, this note will convert into common stock. Based on the terms of the
merger the conversion terms of the debt provide for a beneficial conversion
feature. The value of the beneficial feature is recorded as an offset to the
debt account and will be amortized into interest expense over the original
issuance term. At the merger date, the remaining discount will be amortized
into interest expense.
F-13
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
7. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1999 and 1998:
1999 1998
-------------- --------------
Notes payable (a) $ 653,385 $ -
Liabilities assumed from Virtual Vision (b) 100,000 150,000
Capital leases (c) 56,868 65,510
-------------- --------------
810,253 215,510
Less- Current portion 268,675 62,234
-------------- --------------
$ 541,578 $ 153,276
============== ==============
a. In May 1999, the Company entered into a $625,000 three-year loan
agreement collateralized by its fixed assets. The aggregate remaining
principal balance is $508,421 at December 31, 1999 and payments are due
through 2002 at an interest rate of 13.88%.
In June 1999, the Company entered into a $155,000 five-year
uncollateralized loan agreement. The proceeds were used to finance a
leasehold improvement. The aggregate principal balance is $144,964 at
December 31, 1999 and payments are due through 2004 at an interest rate
of 18%.
b. In connection with the acquisition, the Company assumed a liability
relating to a previous acquisition made by Virtual Vision. At December
31, 1999, the remaining payments under this agreement totaled $100,000,
payable $50,000 per year for each of the next two years. This agreement
also provides for additional payments over the $50,000 per year should
certain technology acquired be used in consumer applications, whereby
payments would be required based on certain percentages of licensing
and sales revenues.
c. The Company is party to a capital lease for certain equipment with
aggregate remaining principal balance totaling $56,867 at December 31,
1999, excluding interest, due through 2003 at an interest rate of 7.27%
Maturity of debt as of December 31, 1999 are as follows:
2000 $268,675
2001 350,916
2002 115,241
2003 49,450
2004 25,971
----------
$810,253
8. SHAREHOLDERS' EQUITY
COMMON STOCK
In July 1999, the Company effected a 1 for 7 reverse stock split, resulting in a
reduction of total common shares outstanding from approximately 30.7 million
shares to approximately 4.4 million shares.
F-15
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During 1999, the Company amended its Certificate of Incorporation and was
authorized to issue 50,000,000 shares of its Common Stock.
PREFERRED STOCK
Through 1999, the Company's Certificate of Incorporation provided for the
issuance of a total of 5,000,000 shares of preferred stock, which could be
issued in various series.
Through 1998, the Company had issued an aggregate of 4,988,827 of Series A
through F preferred stock. The various series generally provided for a
liquidation preference equal to the original purchase price of the preferred
stock, plus accrued but unpaid dividends, if declared, and were generally
convertible at a rate of one share of preferred for one share of common, at the
option of the holder.
During 1999, the Company issued 681,446 shares of Series G preferred stock,
generating aggregate proceeds of approximately $3,847,000. In connection with
the issuance of the Series G preferred, the Company offered exchange credits
whereby those purchasers of Series G preferred, also holders of preferred Series
D, E and F, would exchange Series D, E and F preferred for upgrades to Series
D1, E1 and F1 preferred.
The Series G preferred provided for an immediate liquidation value of $7.05 per
share, in excess of the purchase price. Accordingly, a charge of approximately
$957,000 was recorded against retained earnings to accrete the value of the
preferred stock to its liquidation value.
In July 1999, the Company induced conversion of all preferred series by
providing for conversion rates and terms that were more beneficial than the
original terms. The conversion of all preferred series resulted in the issuance
of 20,124,851 shares of the Company's common stock, 14,474,579 shares in excess
of the number of shares that would have been issued under the original terms of
the preferred series. Accordingly, a charge to retained earnings of
approximately $7,000,000 has been recorded, based on a fair value of
approximately $3.40 per common share, the fair value attributable to the
Company's common stock in the Merger discussed in Note 3.
9. STOCK-BASED COMPENSATION PLANS
The Company has two stock-based compensation plans, described below, which
provide for the grant at fair market value. The Company applies APB Opinion No.
25 and related interpretations of accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123, the
Company's net loss would have been the pro forma amounts indicated below:
1999 1998 1997
--------------- --------------- ---------------
Net loss as reported $ (15,642,545) $ (7,731,427) $ (3,729,568)
Net loss pro forma (16,498,359) (7,949,206) (3,918,208)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are not anticipated.
F-16
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
STOCK OPTION PLAN
As amended in the Certificate of Incorporation, the Company's Stock Plan (the
"Plan") permits the granting of options to purchase an aggregate of 4,500,000
shares of the Company's Common Stock to employees and consultants of the
Company. The Plan also permits the granting of stock purchase rights to
employees and consultants of the Company. Under the Plan, the Company may grant
either incentive or nonstatutory stock options; however, incentive options may
only be granted to employees. The exercise price of an incentive stock option
may not be less than the fair market value, as estimated by management, of the
Company's common shares on the date such option is granted. The exercise price
of a nonstatutory stock option may be less than the fair market value on the
date of grant. In accordance with SFAS No. 123, any grants to other than
employees of the Company, and certain directors, will result in a charge on
earnings based to the fair value of the instruments granted.
Vesting terms of the options range from immediate vesting of all options to a
ratable vesting period of 5-1/2 years. Option activity for the years ended
December 31, 1999, 1998 and 1997 is summarized as follows (all amounts have been
restated to reflect the Company's 1 for 7 reverse stock split (Note 8)):
1999 1998 1997
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise Price
Shares Price Shares Price Shares
------------ ----------- ------------ ----------- ------------ --------------
Outstanding at beginning of year 288,875 $ 18.13 269,642 $ 16.73 284,170 $ 16.80
Options granted 155,666 21.00 24,728 34.44 14,214 28.42
Options exercised - - (714) 17.50 - -
Options forfeited (22,718) 22.43 (1,163) 18.48 (18,071) 22.75
Options canceled (46,521) 21.68 (3,618) 27.23 (10,671) 23.94
----------- ------------ ------------
Outstanding at end of year 375,302 18.59 288,875 18.13 269,642 16.73
=========== ============ ============
Exercisable at end of year 283,389 134,198 16.38 114,095 15.68
=========== ============ ============
Weighted average fair value of
options granted $ 14.84 $ 8.68 $ 8.05
At December 31, 1999, there were 267,555 shares available for grant under the
Plan.
At December 31, 1999, there were 369,136 warrants issued and included in the
Black-Scholes option pricing model for pro forma purposes.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999 and 1998, respectively: risk-free interest
rate of 4.49% and 5.29%; no expected dividend yield, expected lives of 2.6 and
5.3 years; and 78% and 0 expected stock price volatility in 1999 and 1998,
respectively. Exercise prices for outstanding options at December 31, 1999 and
1998 range from $5.20 - $38.00.
F-17
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted Weighted Number Weighted
Number Average Average Exercisable at Average
Range of Exercise Outstanding at Remaining Exercise December 31, Exercisable
Prices December 31, 1999 Contractual Life Price 1999 Price
----------------- ----------------- ---------------- -------- -------------- -----------
$ 5.25 - $15.00 120,315 5 years $ 11.23 119,486 $ 11.23
15.01 - 20.00 76,014 5.9 years 17.99 52,379 18.22
20.01- 25.00 156,334 4.9 years 21.80 106,382 21.67
25.01- 40.00 22,652 8.2 years 37.53 5,143 37.28
-------------- --------------
375,315 283,390
============== ==============
EMPLOYEE STOCK PURCHASE PLAN
During 1994, the Company adopted a noncompensatory Employee Stock Purchase Plan
(the "ESPP"), under which eligible employees may contribute up to 20% of their
base earnings, through payroll deductions, toward the purchase of the Company's
Common Stock. The employees' purchase price is derived from a formula based on
the fair market value of the Common Stock. A total of 200,000 shares of Common
Stock are reserved for issuance under the ESPP, of which 8,326 and 8,396 were
purchased by employees during 1999 and 1998, respectively. No compensation
expense has been recorded in connection with these transactions to date as the
aggregate differences between the purchase price and the fair value of the
common stock purchased have been immaterial.
WARRANTS
In June 1999, the Company issued a warrant to purchase 600,000 shares of the
Company's common stock to an entity for a commitment to participate in future
financings. The warrant is exercisable for a three year period at an exercise
price of $12 per share. The exercise price is subject to change for antidilution
effects, as defined. The intrinsic value of this warrant of approximately
$71,000 was charged to the statement of operations for the year ended December
31, 1999.
10. BUSINESS ALLIANCE AGREEMENT
On July 1, 1993, the Company entered into a Business Alliance Agreement (the
"Agreement") with Harris Corporation, Electronics Systems Sector ("Harris").
Harris develops, manufactures and sells systems which could include FED displays
for use in military aerospace programs. The Agreement provides that Harris and
the Company will work together and cooperate to the extent that each contributes
its particular expertise and knowledge to the development and marketing of
displays for certain military and/or aerospace system applications. The Company
retains full ownership of all intellectual property rights for display
technology that it develops. In addition, the Agreement provides that a
representative of Harris be allowed to attend and participate in the Board of
Directors' meetings of the Company. However, the Harris representative does not
have voting rights. This Agreement extends for seven years and renews
automatically in two-year increments thereafter unless either party notifies
otherwise.
F-18
FED CORPORATION AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
11. COMMITMENTS
ROYALTY PAYMENTS
In 1992, the Company entered into a license agreement with the Microelectronics
Center of North Carolina ("MCNC"), granting the Company exclusive rights to all
inventions and patents developed by MCNC involving field emission technology.
The Company is obligated to pay a royalty in connection with the sale of
products related to certain technologies of .1% to 2%, as defined, with minimum
royalty payments of $50,000 per year through 1997 and $75,000 per year
thereafter for as long as any one of the patents remains valid and outstanding.
There were no sales of products in 1998 or 1997. In 1999, the Company terminated
this license agreement. The Company has recorded $75,000 and $50,000 of royalty
expense in research and development expenses for the years ended December 31,
1998 and 1997, respectively.
The Company, as a result of its acquisition of Virtual Vision (Note 4) was
obligated to pay royalties to Insight Corporation ("Insight") on their license
and sales revenues allocable to the patent application and patent acquired from
Insight. If royalties payable in any year are less than $75,000, the Company may
pay Insight the deficiency and receive a credit against royalties payable in
future years. In 1999, the Company elected not to pay the deficiency and Insight
exercised its right to repurchase the patent application and patent for $75,000.
For the year ended December 31, 1998 the Company had recorded $56,250 of royalty
expense in research and development expenses. There was no royalty expense
incurred during 1999.
LICENSE AND TECHNOLOGY AGREEMENT
In March 1997, the Company entered into a technology agreement with a
corporation to permit potential commercialization of small-format OLED displays.
The Company is dependent upon its license agreement with the corporation for the
development and commercialization of its currently planned OLED products.
Payments are due under evaluation and license agreements based on the
achievement of certain milestones in phases of the agreements. Payments totaling
$650,000 and $250,000 for the years ended December 31, 1999 and 1998,
respectively, were charged to research and development expense under various
phases of these agreements. Based on the remaining phases of the current
agreements, the Company will be required to make additional payments of $250,000
in 2001, if the remaining phases of the agreements are achieved.
OPERATING LEASES
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through January 2004. Certain leases
provide for payments of monthly operating expenses. The approximate future
minimum lease payments are as follows:
Year ending December 31:
2000 $ 2,879,168
2001 2,305,830
2002 1,045,993
2003 914,920
2004 383,534
---------------
$ 7,529,445
===============
For the years ended December 31, 1999 and 1998, rent expense was approximately
$2,813,000 and $1,841,000, respectively.
F-19
PRO FORMA FINANCIAL INFORMATION
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Effective March 15, 2000, Fashion Dynamics Corporation ("Fashion Dynamics"),
through a wholly-owned subsidiary, and eMagin Corporation ("eMagin", formerly
FED Corporation ("FED")) consummated an agreement and plan of merger (the
"Merger"). In connection with the Merger, in March 2000, Fashion Dynamics sold
3,511,905 additional shares of common stock to investors in a private placement
transaction, generating net proceeds of approximately $24.5 million. The
accompanying unaudited pro forma balance sheet as of December 31, 1999, presents
the financial position of Fashion Dynamics and eMagin, assuming the Merger had
been at that date. The unaudited pro forma statement of operations for the year
ended December 31, 1999, reflects the Merger as if it had been consummated on
January 1, 1999.
Fashion Dynamics acquired 100% of the outstanding shares of eMagin through the
issuance of 8,721,680 shares of Fashion Dynamics common stock, based on an
exchange ratio of 2 shares of Fashion Dynamics common stock for each share of
eMagin common stock. As a result of the Merger, the eMagin stockholders
collectively acquired approximately 35% of the Fashion Dynamics common stock
outstanding after the Merger. Additionally, Fashion Dynamics will convert
approximately 1,600,000 stock options that were outstanding to eMagin employees,
into 3,200,000 Fashion Dynamics stock options, at exercise prices ranging from
$1.70 to $6.11. The accompanying unaudited pro forma financial information does
not include equity transactions subsequent to December 31, 1999 not directly
associated with the Merger, except for the issuance of common stock in
connection with the private placement in March 2000 referred to above. This
transaction will be accounted for as a purchase by Fashion Dynamics. The total
purchase price for this transaction including expenses will be approximately
$79 million.
The pro forma financial information does not purport to be indicative of the
results which would have actually have been obtained had such transactions been
completed as of the assumed dates and for the periods presented or which may be
obtained in the future. The pro forma balance sheet and the pro forma
adjustments described in the notes to pro forma financial statements reflect the
excess of purchase price over the net book value of assets acquired as "Purchase
Price to be Allocated". The Company is currently in the process of determining
the appropriate values of assets and liabilities acquired, including the
identification of intangible assets, if any. Additionally, considering that
eMagin is a development stage entity, and has been since its inception in
1992, management expects that a portion of the purchase price will be
attributable to purchased in-process research and development, and that amount
may be significant. In accordance with Statement of Financial Accounting
Standards No. 2, "Accounting for Research and Development Costs", as clarified
by Financial Accounting Standards Board Interpretation No. 4, amounts assigned
to in-process research and development will be charged to expense as part of
the allocation of purchase price.
F-20
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA BALANCE SHEET - ASSETS
AS OF DECEMBER 31, 1999
(UNAUDITED)
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
----------- ------------- --------------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 718,468 $ 24,150,000 (b) $ 24,268,468
(600,000) (e)
Contract receivables, net - 73,304 73,304
Unbilled costs and estimated profits on
contracts in progress - 221,723 221,723
Prepaid expenses and other current assets - 127,658 127,658
----------- ------------- ----------------
Total current assets - 1,141,153 24,691,153
PROPERTY AND EQUIPMENT, NET - 1,214,680 1,214,680
PURCHASE PRICE TO BE ALLOCATED - 2,671,390 (2,671,390) (d) 82,231,000
79,342,000 (d)
2,889,000 (e)
OTHER ASSETS - 10,451 10,451
----------- ------------- --------------
$ - $ 5,037,674 $ 108,147,284
=========== ============= ==============
F-21
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA BALANCE SHEET - LIABILITIES AND SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 1999
(UNAUDITED)
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
------------ ----------------- ---------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ - $ 634,967 $ 634,967
Accrued payroll and benefits - 1,100,958 1,100,958
Other accrued expenses - 256,905 256,905
Short-term debt - 2,126,700 (1,333,333) (c) 793,367
Current portion of long-term debt - 268,675 268,675
Other current liabilities - 48,270 48,270
------------ ----------------- --------------------
Total current liabilities - 4,436,475 3,103,142
------------ ----------------- --------------------
LONG-TERM DEBT - 541,578 541,578
------------ ----------------- --------------------
SHAREHOLDERS' EQUITY:
Preferred stock - - -
Common stock 20,156 43,806 (8,376) (a) 25,862
3,464 (b)
784 (c)
(34,299) (d)
327 (e)
Additional paid-in capital 10,844 47,254,459 8,376 (a) 105,683,335
24,146,536 (b)
5,489,413 (c)
26,485,034 (d)
2,288,673 (e)
Deficit accumulated during the development stage (31,000) (47,238,644) 47,238,644 (d) (1,206,633)
(1,175,633) (c)
------------ ----------------- --------------------
Total shareholders' equity - 59,621 104,502,564
------------ ----------------- --------------------
$ - $ 5,037,674 $ 108,147,284
============ ================= ====================
F-22
FASHION DYNAMICS CORPORATION AND FED CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
FASHION PRO FORMA
DYNAMICS FED ADJUSTMENTS COMBINED
------------ ----------------- ---------------- --------------------
CONTRACT REVENUES $ - $ 1,895,426 $ 1,895,426
---------- --------------- --------------
COSTS AND EXPENSES:
Research and development,
net of funding under cost sharing arrangement - 10,171,387 10,171,387
General and administrative expenses 18,452 5,203,201 15,354,000 (f) 20,575,653
Non-cash charge for induced conversion of debt - 1,917,391 1,917,391
---------- --------------- --------------
18,452 17,291,979 32,664,431
---------- --------------- --------------
Loss from operations (18,452) (15,396,553) (30,769,005)
INTEREST EXPENSE - (507,900) 54,068 (g) (1,629,465)
(1,175,633) (c)
INTEREST INCOME - 104,208 104,208
---------- --------------- --------------
(Loss) before provision for income taxes (18,452) (15,800,245) (32,294,262)
PROVISION FOR INCOME TAXES - - -
---------- --------------- --------------
Net (loss) $ (18,452) $ (15,800,245) $ (32,294,262)
========== =============== ==============
NET (LOSS) PER SHARE - BASIC AND DILUTED $ (1.25)
==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 25,862,352 (h)
==============
F-23
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
In the Merger, Fashion Dynamics acquired all of the outstanding shares of eMagin
through the issuance of 9,505,994 shares of Fashion Dynamics common stock, as
well as the exchange of outstanding eMagin stock options for Fashion Dynamics
stock options. The Merger will be accounted for as an acquisition, with Fashion
Dynamics as the acquiror. The shares issued by Fashion Dynamics in the Merger
are valued at $7.00 per share, the value of the common shares sold in the
private placement transaction consummated in connection with the Merger.
The unaudited pro forma balance sheet combines the balance sheets of Fashion
Dynamics and eMagin as of December 31, 1999, assuming that the Merger had been
completed at that date. The unaudited pro forma statement of operations combines
the statements of operations of Fashion Dynamics and eMagin for the year ended
December 31, 1999, assuming the Merger occurred on January 1, 1999.
The historical balance sheets and statements of operations as of and for the
year ended December 31, 1999, used in the preparation of the pro forma financial
statements have been derived from the respective audited financial statements of
Fashion Dynamics and eMagin.
UNAUDITED PRO FORMA ADJUSTMENTS
Descriptions of the adjustments included in the unaudited pro forma financial
statements are as follows:
BALANCE SHEET ADJUSTMENTS
(a) Reflects the cancellation of 8,375,628 Fashion Dynamics shares by Fashion
Dynamics' majority shareholder effected prior to the Merger.
(b) Reflects Fashion Dynamics' receipt of $24,483,000 of proceeds, net of
approximately $100,000 of related expenses, from a private placement of
3,464,286 shares of common stock in March 2000.
(c) Reflects the conversion of a bridge loan in the amount of $1,333,333 into
approximately 784,300 shares of common stock at a conversion price
of $1.70 per share and the amortization of the remaining discount.
(d) Reflects the accounting for the Merger as the purchase of eMagin's common
stock for a total purchase price of approximately $79,342,000, consisting
of the issuance of 9,505,994 shares of Fashion Dynamics' common stock,
valued at approximately $66,542,000, or $7.00 per share, the per share
value of the common shares sold in the private placement consummated in
connection with the Merger and approximately $12,800,000 relating to the
F-24
value of Fashion Dynamics' stock options exchanged for outstanding eMagin
stock options, with the elimination of eMagin's equity accounts.
(e) Reflects the estimate of expenses to be incurred in connection with the
Merger of approximately $600,000, plus approximately 327,000 common shares
issued as part of a finder's fee, valued at $7.00 per share, recorded as
additional purchase price.
INCOME STATEMENT ADJUSTMENTS
(f) Reflects the amortization of purchase price to be allocated over a 5-year
amortization period. Actual amortization for future periods will be
dependent upon the final allocation of purchase price, when completed, to
identifiable intangible assets, in-process research and development and
goodwill, if any, and the evaluation of appropriate useful lives for such
assets. The Company is currently in the process of evaluating the fair
values of assets acquired, including identifiable intangible assets, if
any. Additionally, considering that eMagin is a development stage entity,
and has been since its inception in 1992, management expects that a portion
of the purchase price will be attributable to purchased in-process research
and development, and that amount may be significant. In accordance with
Statement of Financial Accounting Standards No. 2, "Accounting for Research
and Development Costs", as clarified by Financial Accounting Standards
Board Interpretation No. 4, amounts assigned to in-process research and
development will be charged to expense as part of the allocation of
purchase price.
(g) Eliminates interest expense that would not have been incurred if bridge
loans were converted at the beginning of the year.
(h) Reflects the weighted average number of shares outstanding for the year,
after giving effect to the Merger, calculated as the historical weighted
average common shares for Fashion Dynamics, reduced by 8,375,628 shares
cancelled by Fashion Dynamics' majority shareholder, plus shares issued in
connection with the private placement, shares issued to eMagin and shares
issued as part of the cost of the transaction relating to the Merger.
F-25