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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-24757
eMagin Corporation
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(Exact name of registrant as specified in its charter)
Nevada 88-0378451
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
[LOGO]
2070 Route 52
Hopewell Junction, New York 12533
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(Address of principal executive offices) (Zip Code)
(845) 892-1900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 2001 was approximately $49.8 million, based upon the
closing sales price of the Registrant's common stock as quoted on the NASDAQ
National Market on such date. The number of shares outstanding of the
Registrant's common stock as of March 1, 2001 was 25,069,143
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement") (to be filed with the Securities and
Exchange Commission on or before May 30, 2001 is incorporated by reference in
Part III hereof).
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FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
INDEX
PART I
Item 1: Description of Business
Item 2: Description of Property
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Item 8: Financial Statements
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K
SIGNATURES
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FORWARD-LOOKING STATEMENTS
Some of the statements in this report contain forward-looking
information. These statements are found in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." They include statements concerning:
o our business strategy;
o expectations of market and customer response;
o liquidity and capital expenditures;
o future sources of revenues;
o expansion of our proposed product line; and
o trends in industry activity generally;
You can identify these statements by forward-looking words such as
"expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will" or
similar words. You should be aware that these statements are subject to known
and unknown risks, uncertainties and other factors, including those discussed in
the section entitled "Risk Factors," that could cause the actual results to
differ materially from those suggested by the forward-looking statements. For
example, assumptions that could cause actual results to vary materially from
future results include, but are not limited to:
o our ability to successfully develop and market our products to
customers;
o our ability to generate customer demand for our products in
our target markets;
o the development of our target markets and market
opportunities;
o our ability to manufacture suitable products at competitive
cost;
o market pricing for our products and for competing products;
o the extent of increasing competition;
o technological developments in our target markets and the
development of alternate, competing technologies in them; and
o sales of shares by existing shareholders
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PART I
ITEM 1: BUSINESS
Overview
We are a leading developer of microdisplays and related imaging
technology, which we believe will be a key enabling component for mobile
electronic products, including digital cameras, camcorders, entertainment and
gaming headsets, hand-held Internet and telecommunications appliances and
personal computers. Using our technology, a microdisplay smaller than one inch
diagonally can produce an image that appears comparable to that of a computer
monitor or a large-screen television.
Our microdisplays are based upon organic light emitting diode
(OLED)-on-silicon technology. OLED-on-silicon microdisplays offer a number of
advantages over current liquid crystal microdisplays, including increased
brightness, lower power requirements, less weight and wider viewing angles. We
license fundamental OLED technology from Eastman Kodak and have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We expect that the integration of our OLED-on-silicon
microdisplays into mobile electronic products will result in lower overall
system costs to our original equipment manufacturer (OEM) customers. Stanford
Resources, an industry market research organization, has recently identified the
emergence of OLED technology as a major advance, likely to become a major
industry driver. As the first to exploit OLED technology for microdisplays, we
believe that we will enjoy a significant advantage in commercializing this new
technology. We are the only company to announce and publicly show full-color
OLED-on-silicon microdisplays and this achievement has been recognized by the
Society for Information Display and Information Display Magazine who designated
us as winner of the prestigious Display of the Year Gold Award. We have
facilities suitable for producing commercial quantities of our initial
microdisplays, and we expect to begin commercial production during the
second half of 2001.
Our Market Opportunity
We expect the increasing demand for high resolution mobile electronic
products to drive the growth of the microdisplay industry. According to Display
Search, an industry market research organization, the microdisplay market is
currently projected to be a $700 million industry in the year 2000 and is
expected to grow to $2.3 billion over the next five years. Display Search also
projects the overall flat panel display industry will grow from $19.0 billion in
1999 to over $61 billion in 2005.
We believe our microdisplays, when combined with compact optic lenses,
will become a key component for a number of mobile electronic products. We are
targeting the following applications:
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Near-Eye Viewers for Digital Cameras, Camcorders and hand-held Internet
and telecommunications appliances
We believe that our microdisplays will enhance near-eye applications in
the following products:
o Digital cameras and camcorders, which typically use direct view
displays that are low resolution, offer a small visual image, and
are difficult to see on sunny days. According to Display Search,
41 million digital cameras and 13 million camcorders are expected
to be sold in 2005. Some of these products may incorporate
microdisplays as high resolution viewfinders which would permit
individuals to see enlarged, high resolution proofs immediately
upon taking the picture, giving them the opportunity to retake a
poor shot.
o Mobile phones and other hand-held Internet and telecommunications
appliances which will enable users to access full web and fax
pages, data lists, and maps in a pocket-sized device. According
to the Fuji Chimera Research Institute, an industry market
research organization, by 2005 the cellular phone and handheld
portable digital assistant markets will grow to 655 million units
and 20 million units, respectively. Some of these products may
eventually incorporate our microdisplays.
For each of these applications, we anticipate that our microdisplays,
combined with compact optic lenses, will offer higher resolution, lower power
and system cost and achieve larger images than are currently available in the
consumer market. As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.
Head-wearable displays
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, or simple head bands. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
o Entertainment and gaming video headset systems, which permit
individuals to view television (including HDTV), video CDs, DVDs
and video games on virtual large screens or stereovision in
private without disturbing others. According to DisplaySearch and
Fuji Chimera, gaming systems are expected to be a greater than 46
million unit business by 2005. Some of these products may
eventually incorporate our microdisplays. According to Display
Search, entertainment video system sales (TV and HDTV) are
expected to exceed 166 million units in 2003. Our microdisplays
have the potential to displace some of these units.
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o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase
privacy. Display Search, Fuji Chimera, and Frost and Sullivan
each estimate annual unit sales of notebook computers to exceed
47 million units by 2005. Current notebook computers do not use
microdisplays. Our market can apply not only to new notebook
computers, but also as aftermarket attachments to older notebooks
still in use. We expect to market our head-wearable displays to
be used as peripherals with most notebook computers.
o Handheld personal computers, whose small, direct view screens are
often a limitation, but which are now capable of running software
applications that could benefit from a larger display.
Microdisplays can be built into handheld computers to display
more information content on virtual screens. This market is still
in its infancy, but is expected to grow significantly.
o Super compact personal computers and personal digital assistants
(PDAs) using video headsets as screens can be made possible by
high resolution microdisplays. An under one pound pocket-size
computer could be created with a fold out keyboard and a headset
that provides a near desktop personal computer experience.
We believe that the combination of power efficiency, high resolution,
low systems cost, brightness and compact size offered by our OLED-on-silicon
microdisplays has not been made available to makers and integrators of existing
entertainment and gaming video headset systems, notebook computers and handheld
computers. In addition, we believe that our microdisplays will catalyze the
growth of new products and applications such as lightweight wearable computer
systems.
Military
Military demand for head-wearable displays is currently being met with
microdisplay technologies that we believe to be inferior to our OLED-on-silicon
head-wearable displays under development. According to Frost and Sullivan, an
industry market research organization, the total market for military flat panel
displays reached approximately $70 million in 1998 and is projected to grow
rapidly through 2005. Frost and Sullivan further projected that the current
military microdisplay market of less than $3 million should increase at an
overall growth rate in excess of 40 percent, and that microdisplays will
penetrate airborne, seaborne, and land applications, providing more mobile and
more rugged displays. New uses are being envisioned by the military for
individual soldiers, as well as in the areas of simulation, training,
operations, maintenance, and logistics in all branches of the military.
Commercial and Industrial
We believe that a wide variety of commercial and industrial markets
offer significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: 1) immediate access to inventory (parts, tools and equipment
availability), 2) instant accessibility to maintenance or construction manuals,
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3) routine quality assurance inspection, and 4) real-time viewing of images and
data during microsurgery or endoscopy.
Our Products
We believe that our OLED-on-silicon microdisplay and Microviewer(TM)
products which are currently under development will provide low-cost, high
resolution and full color video viewing, while maintaining miniature physical
size, light weight, and power efficiency.
Our initial products include OLED-on-silicon microdisplays,
Microviewers(TM) and head-wearable displays. We view our greatest initial
opportunities to include those markets where both performance and overall
display system cost requirements are not met by current commercially available
microdisplays.
We believe that our strategy of offering our products as both separate
components and integrated bundles that include microdisplays and lenses will
allow us to address the needs of the largest number of potential customers.
Our three major product groups are:
o eMagin OLED-on-silicon microdisplays for integration into
consumer and vertical market OEM products.
We plan to serve as a component manufacturer by supplying our
OLED-on-silicon microdisplays for those customers who have their own lenses or
integrated circuits.
o eMagin Microviewer(TM) modules that incorporate our
OLED-on-silicon microdisplay, compact lenses and electronic
interfaces for integration into consumer and vertical market OEM
products.
We plan to provide a cost-effective and rapid time to market
alternative for those customers who want a complete microdisplay and lens
assembly to integrate into their end product design. By providing an integrated
solution, we plan to allow OEM customers who require optical solutions to avoid
incurring expensive design and tooling costs.
o eMagin head-wearable display system designs for non-consumer
markets (commercial, industrial, medical, and military). Headsets
which incorporate Microviewers(TM) can be a part of larger
information systems for OEM customers, or attach directly to
existing systems platforms.
We intend to provide our design and manufacturing capabilities to those
customers who want a fully integrated, head-wearable solution.
We expect that our product offerings will significantly increase our
value-added for our potential customers and increase our revenue and margins. By
designing and tooling new microdisplay lenses and compatible solutions at each
level required by our various customers, we can reduce cost and time to market
for both eMagin and our OEM customers.
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OLED-on-Silicon Microdisplays
Our OLED-on-silicon microdisplays represent a new generation of
microdisplay technology. Because our microdisplays generate and emit light, they
have a wider viewing angle than the competing liquid crystal microdisplays, and
because they have the same high brightness at all forward viewing angles, our
microdisplays permit a large field-of-view and superior optical image. The wider
viewing angle of our display results in the following superior optical
characteristics: (1) the user does not need to as accurately position the
head-wearable display to the eye, (2) the image will change minimally with eye
movement and appear more natural, and (3) the Microviewer(TM) can be placed
further from the eye. In addition, our OLED-on-silicon microdisplays can offer
faster response times and use less power than liquid crystal microdisplays.
Since our displays are built on integrated circuit silicon chips, many computer
and video electronic system functions can be built directly into the display,
resulting in very compact, integrated systems. We expect this, coupled with our
lenses, to result in lower overall system costs.
We have recently completed the development of the first version of our
initial customer-oriented microdisplay, which has SVGA+ resolution. We are
currently developing a high luminance SXGA integrated circuit. These integrated
circuits become microdisplays when OLEDs and color filters are built on top of
the integrated circuit. We plan to sell our OLED-on-silicon microdisplays for
use as components by customers who prefer to design and build their own lenses.
We also plan to offer OLED processing on our customers' integrated circuits to
some OEMs who design their own integrated circuits.
o 0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52
added columns of data) for Consumer OEMs. This display has a
resolution of 852 x 3 x 600 pixels. The SVGA+ is planned as a
full-color or monochrome microdisplay primarily for high-end
consumer OEM products such as video/data head-wearable displays,
digital cameras, video cameras and game applications. Several
specialty medical, industrial, and military product manufacturers
have also expressed interest in this product. The initial stage
of technological development of this product is now complete and
the monochrome version was demonstrated at an industry convention
in Japan in October 2000. We are targeting initial sampling of
the color version in 2001. This product is designed to interface
with most portable personal computers and will be able to display
TV, DVD, and HDTV formats.
o 0.77-inch Diagonal SXGA (Super Extended Video Graphics Array) for
Industrial, Medical and Military Applications. We are developing
an introductory SXGA microdisplay product as a personal computer
compatible headset display for military, medical, high-end
commercial, and industrial applications. This product will have
1280 x 1024 pixels. This digital video and data interface product
is being designed to exhibit a wide dimming range and high
luminance for special military applications. We anticipate that
the performance features of the SXGA, such as high speed digital
video and 256 gray levels, have the potential to serve as a
catalyst for the development of new applications.
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o 0.24-inch Diagonal QVGA (Quarter Video Graphic Array with 320 x
240 pixels) for Consumer OEM Viewfinder and Game Applications.
The integrated circuits for these displays are in the early
stages of design and development. We plan to market these
microdisplays to lower price point camera and gaming
applications. We believe OEM customers could insert these
displays into existing products and optical systems with
relatively little system redesign effort. We expect these
microdisplays to be more cost effective for OEM customers than
the current liquid crystal microdisplays since our microdisplays
use less power, are simpler to assemble, require minimal added
circuitry, and require no separate light sources. We also believe
our microdisplays can be more compact and provide high quality
viewing to the end consumer without some of the problems
exhibited by other technologies, such as limited temperature
range, flicker, color sequential breakup, or angular light
dependence.
Microviewer(TM) Products
We are developing Microviewer(TM) modules which combine microdisplays
with compact optic lenses. Our combination of display and lenses provides large,
easy to view images that can be easily adapted to many end products. Our initial
display modules are designed to be compatible with a large number of electronics
interfaces.
We believe that a complete imaging solution may be a fundamental
requirement for many new product categories because of the complementary
requirements of illumination, lenses, and electronic interfaces. Once a complete
Microviewer(TM) module with an electronics interface is made, the creation of a
headset or personal viewer appliance primarily involves issues of styling
design, feature selection, and market channels.
We intend to sell our Microviewer(TM) modules to OEMs for integration
with their branded products or incorporated into our eGlass(TM) Personal
Viewer(TM) head-wearable displays. Many of our potential customers have stated a
preference for Microviewers(TM) over microdisplays since Microviewers(TM)
incorporate lenses which save OEMs a step in their manufacturing process. We
intend to sample our Microviewer(TM) products concurrently with, or as soon as
practicable after, the initial sampling of the base microdisplay.
eGlass(TM) Personal Viewer(TM) Head-Wearable Systems
Personal Viewer head-wearable systems, such as our eGlass(TM) Personal
Viewer(TM), give users the ability to work with their hands while simultaneously
viewing information or video on the display. Our head-wearable displays are a
versatile computer enabler, capable of delivering an image that appears
comparable to that of a 19-inch monitor at 22 inches from the eye using a 1.5
inch Microviewer(TM). We believe that Personal Viewer head-wearable displays
will fill the increasing demand for instant data accessibility in mobile
workplaces. We expect to sell the head-wearable displays primarily to OEM
systems and equipment customers. Our initial head-wearable products utilize
technologies other than OLED and we may continue to use such technologies in the
future.
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Our Strategy
Our strategy is to establish and maintain a leadership position in the
microdisplay industry by capitalizing on our leadership in both OLED-on-silicon
technology and microdisplay lenses technology. We intend to:
Leverage our superior technology to establish a leading market
position. As the first to exploit OLED-on-silicon microdisplays, we believe that
we enjoy a significant advantage in bringing this technology and its variants to
market. We believe that we have consolidated this advantage through our Eastman
Kodak license, other strategic relationships, and the development of our own
substantial intellectual property portfolio. We have an experienced management
team with substantial product development and manufacturing acumen. We plan to
maintain and further dedicate significant resources to expand our expertise and
to protect our intellectual property. We will also continue our technology
development collaborations with third parties. We believe that by leveraging our
intellectual property and our design capabilities, we can become a leader in the
emerging microdisplay industry.
Develop products for large consumer markets through key relationships
with OEMs. We expect our first target markets, entertainment and gaming systems
and personal computers, to create the first large-scale opportunities for our
OLED-on-silicon microdisplays. Our relationships with OEMs for these products,
have allowed us to identify initial microdisplay products to be produced for
headsets, followed by other applications such as digital cameras, camcorders and
hand-held Internet and telecommunications appliances. We expect digital cameras,
camcorders, and hand-held Internet and telecommunications appliances to emerge
as significant markets as production costs are reduced.
Increase revenues by completing our OEM qualification cycle. We have
been approached by a number of OEMs who are interested in incorporating our
SVGA+ microdisplay into their products. We intend to ship evaluation packages to
OEMs by mid-2001, which is the first step towards having the SVGA+ qualified for
use at the OEM level. The OEM qualification process typically takes 6 to 24
months. We then expect to receive our first volume orders for our microdisplays.
We have maintained detailed communications during the design phase of the SVGA+
with several prospective customers. As subsequent products are developed, they
will usually go through a similar evaluation cycle.
Optimize manufacturing efficiencies. We intend to outsource certain
capital-intensive portions of microdisplay production to minimize both our costs
and time to market. We intend to outsource integrated circuit fabrication while
retaining the OLED application and OLED sealing processes in-house. We believe
that these areas are where we have a core competency and manufacturing
expertise. We also believe that by keeping these processes in-house we can
protect our proprietary technology and process know-how. This strategy will also
enhance our ability to continue to optimize and customize processes and devices
to meet customer needs. In the area of lenses and head-wearable displays, we
intend to focus on design and development, while working with third parties for
the manufacturing and distribution of finished products. Similarly, we intend to
outsource volume manufacturing operations for optical systems while
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continuing to prototype and use low volume capability in-house. We will continue
to outsource part of our manufacturing when we deem it to be appropriate.
Build and maintain strong internal design capabilities. As more
circuitry is added to OLED-on-silicon devices, the cost of the end product using
the display can be decreased; therefore integrated circuit design capability
will become increasingly important to us. To meet these requirements, we intend
to continue to support building strong in-house design capabilities. Building
and maintaining this capacity will allow us to reduce engineering costs,
accelerate the design process and enhance design accuracy to respond to our
customers' needs as new markets develop. In addition, we intend to maintain a
product design staff capable of rapidly developing prototype products for our
customers and strategic partners. Contracting third party design support to meet
demand and for specialized design skills is expected to remain a part of our
overall long term strategy.
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
research and development activities to better meet our customer's requirements.
Moreover, we expect to provide microdisplays and Microviewers(TM) to some of
these partners, thereby solidifying and utilizing established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED
materials, and a potential future customer for both specialty market display
systems and consumer market microdisplays. Eastman Kodak owns equity in eMagin
and is an advisor to our Board of Directors. We license Eastman Kodak's OLED
technology portfolio.
We have a nonexclusive, worldwide license to use Eastman Kodak patented
OLED technology and associated intellectual property in the development, use,
manufacture, import and sale of microdisplays. The license covers emissive
active matrix microdisplays with a diagonal size of less than 2 inches. Our
license expires upon the expiration of the last-to-expire issued Eastman Kodak
OLED technology related patent covered under the license agreement. An annual
minimum royalty is paid upfront at the beginning of each calendar year and is
fully creditable against the royalties we are obligated to pay based on net
sales throughout the year. We have also granted to Eastman Kodak a nonexclusive
right to patents and associated intellectual property relating to OLED
technology developed by us, including the right to sublicense such technology to
third parties, in exchange for royalty payments in certain instances. Eastman
Kodak and eMagin have also engaged in numerous discussions regarding potential
product applications for eMagin's microdisplays by Eastman Kodak.
o We have entered into a joint research and development agreement with
IBM to accelerate the development of OLED-on-silicon technology. The
OLED-on-silicon microdisplays
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developed under the agreement have the potential to be incorporated in
future IBM products currently in exploratory or product development
stages. Nonexclusive, fully-paid-up license rights are available to us
or IBM for any intellectual property developed solely by the other
party under the agreement. This technology will be incorporated into
microdisplays for possible use in future microdisplay products,
including those manufactured by IBM, such as wearable computers and
handheld portable Internet appliances. The technology efforts resulted
in the development of a prototype watch computer utilizing the Linux
operating system, which features the world's first direct view OLED-on
silicon-display. The prototype was publicly demonstrated in January
2001 at the Consumer Electronics Show.
We also have a joint OLED materials development effort with Covion
Organic Semiconductors GmbH, a spin-off of Hoechst. We have worked with
Honeywell, Kaiser Electronics and Raytheon on a variety of U.S. government
research and development proposals and contracts toward the development of
displays for military and consumer applications. The US Air Force and US Army
are currently providing support under government research and development
contracts for microdisplay development with a goal of future procurement. We
currently also maintain industry relationships with LG Electronics, Harris,
Boeing, Department of Defense Advanced Research Projects Agency (DARPA), NASA,
Department of Commerce National Institute of Science and Technology (NIST),
Lawrence Livermore National Laboratories, Carnegie Mellon University, and the
United States Display Consortium, among others. We intend to establish
additional strategic relationships in the future.
Our Technology
We are in the later stages of development of advanced microdisplay
components and modules based on OLED-on-silicon technology. We have invested
over $34 million in developing OLED-on-silicon and related technologies during
the past four years which we believe will allow us to offer our potential
customers state-of the art microdisplay solutions. Additionally, approximately
$27 million in government funding has been applied toward further establishing
our overall technological capability in displays, most of which is directly
applicable to our microdisplay technology. We believe that our existing and
development-stage display technologies will position us to meet customer
requirements for performance and price for a variety of applications that
require high resolution, wide field of view, and low power consumption.
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s.
OLEDs are thin films of stable organic materials that emit light of various
colors when a voltage is impressed across them. OLEDs are emissive devices,
which means they create their own light, as opposed to liquid crystal displays,
which require a separate light source. As a result, OLED devices use less power
and can be capable of higher brightness and fuller color than liquid crystal
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microdisplays. Because the light they emit is Lambertian, which means that it
appears equally bright from most forward directions, a moderate movement in the
eye does not change the image brightness or color as it does in existing
technologies. OLED films may be coated on computer chips, permitting millions of
individual low-voltage light sources to be built on silicon integrated circuits
to produce single color, white, or full-color display arrays. Many computer and
video electronic system functions can be built directly into a silicon
integrated circuit upon which the OLED may be coated, resulting in an
ultra-compact system. We believe these features, together with the
well-established silicon integrated circuit fabrication technology of the
semiconductor industry, make our OLED-on-silicon microdisplays attractive for
numerous applications.
We believe our technology licensing agreement with Eastman Kodak,
coupled with our own intellectual property portfolio, gives us a leadership
position in OLED and OLED-on-silicon microdisplay technology. Eastman Kodak
provides many of the underlying OLED technologies and we provide additional
technology advancements that have enabled us to coat the silicon integrated
circuits with OLEDs. We expect OLED-on-silicon to bring features and benefits to
the microdisplay market including: high resolution, high luminance, flicker-free
imaging, high energy efficiency, thin, compact size, and low system cost. We
believe that the combined quality of these features surpasses any other
microdisplay technology currently available. OLED-on-silicon technology also
permits many additional functions to be integrated into the silicon integrated
circuit as part of the OLED microdisplay, making OLED-on-silicon a logical
choice for microdisplay system solutions.
We have developed numerous and significant enhancements to OLED
technology as well as key silicon circuit designs to effectively incorporate the
OLED film on a silicon integrated circuit. For example, we have developed a
unique, up-emitting structure for our OLED-on-silicon devices that enables OLED
displays to be built on opaque silicon integrated circuits rather than only on
glass. Our OLED devices can emit full visible spectrum light that can be
isolated with color filters to create full color images. Our microdisplay
prototypes have a brightness that can be greater than that of a typical notebook
computer and can have a potential lifetime of over 50,000 hours, in certain
applications. New materials and device improvements in development offer the
future potential for even better performance for brightness, efficiency, and
lifespan. Additionally, we have invested considerable work over several years to
develop unique electronics control and drive designs for OLED-on-silicon
microdisplays.
In addition to our OLED-on-silicon technology, we have developed
compact optic and lens enhancements which, when coupled with the microdisplay,
provide the high quality large screen appearance that we believe a large
proportion of the marketplace demands.
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Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant
advantages over existing solutions in our targeted microdisplay markets. We
believe these key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen
size;
o Low power consumption for improved battery life and longer system
life;
o Long operating life;
o High brightness for improved viewing; and
o High speed performance resulting in clear video images.
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built
on an 8-inch silicon wafer using existing automated OLED and color filter
processing tools. The level of automation used lowers labor costs. Only a small
amount of OLED material is used in OLED-on-silicon microdisplays so that
material costs, other than the integrated circuit itself, are small.
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits (ASICs), or
beam splitter lenses as is the case in liquid crystal microdisplays. Many
important display-related system functions can be incorporated into an
OLED-on-silicon microdisplay, reducing the size and cost of the system. Lenses
for many OLED-on-silicon applications can be made of a single piece of molded
plastic which reduces size, weight and assembly cost when compared to the
multipiece lens systems used for liquid crystal microdisplays. Because our
displays are power efficient, they typically require less power at the system
level than other display technologies at a given display size and brightness.
Wide angle light emission resulting in large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective liquid crystal on silicon microdisplays. This results in less eye
fatigue and makes it relatively easy to position the imaging systems.
Low power consumption for improved battery life and longer system life.
OLEDs can be energy efficient because of their high efficiency light generation.
Power efficiency can be high in OLED displays because they require only low
voltage switching (2-5 volts is typical, depending on the mode of operation) and
less display-external electronics. Furthermore, OLEDs conserve power by powering
only those pixels that are on while liquid crystal on silicon requires light at
15
all pixels all the time. The optical systems used for our OLEDs are highly
efficient, permitting over 80% of the light to reach the eye, versus reflective
technologies such as liquid crystal on silicon which require multiple beam
splitters to get light to the display, and then into the optical system. This
results in typically under 25% light throughput efficiency in reflective
microdisplay systems.
Long operating life. Most of our potential customers require 5,000 to
10,000 hours of half-life. Half-life references how long it takes the operating
display to reach half of its starting brightness. We believe our OLED display
technology already exceeds these numbers for most of our consumer product
applications.
High brightness for improved viewing. Because OLEDs have electrical
characteristics similar to those of semiconductor diodes, they can run at very
high brightness with only a moderate increase in voltage. This will enable us to
build extremely bright displays using drive voltages of 24 volts or less. This
feature can be of great value to military applications, where there is a need to
see the computer image overlayed onto brightly lighted real-life backgrounds
such as desert sand, water reflections or sunlit clouds. The OLED can be
operated over a large luminance range without loss of gray level control,
permitting the displays to be used in a range of dark environments to very
bright ambient applications. Since military simulation and situation awareness
applications, including night vision, typically require large fields of view,
the OLED's Lambertian optical characteristics make it an excellent choice.
High speed performance resulting in clear video images. The OLEDs
switch much more quickly than liquid crystals or cathode ray tubes (CRTs). This
characteristic, coupled with the storage of data at each pixel, results in a
stable image and produces no noticeable flicker, even at relatively slow refresh
rates. This eliminates visible image smear and makes practicable
three-dimensional stereo imaging using a split frame rate. This advantage of our
OLED-on-silicon is very important for 3-D stereovision gaming applications.
Because the OLED-on-silicon stores brightness and color information at
each pixel, the display can be run with no noticeable flicker and no color
sequential breakup. Color sequential breakup occurs in systems such as liquid
crystal on silicon and some liquid crystal display microdisplays when red, green
and blue frames are sequentially imaged in time for the eye to combine. Since
the different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a tough technological challenge as display
resolutions increase.
16
Our OLED-related Technological Milestones
We believe that we have made significant breakthroughs in
OLED-on-silicon microdisplay technology and that the following represent key
milestones:
Date Milestone
- ------------------------- ---------------------------------------------------------------------------------
May 1998 The first publicly displayed OLED-on-silicon integrated circuit video graphics
array video (monochrome VGA, 640x480 pixels). This showed that OLED
microdisplays could be built directly on silicon integrated circuits.
February 1999 The first publicly displayed up-emitting full color OLED-on-silicon video. (Low
resolution QVGA, 320x240 pixels using color filters). This showed that color
video capable OLEDs could be built on silicon integrated circuits using color
filters.
May 2000 The world's highest efficiency, bright white OLED-on-silicon publicly displayed
to date. We also demonstrated the world's highest resolution OLED display
publicly displayed to date (1280x1024 pixels) using a new white light emitter in
an OLED-on-silicon display. This showed that our OLEDs-on-silicon could provide
a good quality bright white image and could generate high resolution moving
images with quality gray scale control.
September 2000 The first publicly displayed full-color active matrix OLED-on-silicon
microdisplay (VGA resolution, 640x480 pixels). The display used color filters
built directly on top of the OLED display and incorporated our white light
organic light emitting diodes technology. This showed the first near
product-quality color moving images using OLED-on-silicon technology.
October 2000 We previewed the world's highest resolution super video graphics array (SVGA+,
852 x 3 x 600 pixels, over 1.5 million color elements) which was the first active
matrix OLED-on-silicon microdisplay designed for consumer applications ever
publicly displayed. The display was shown in white monochrome, but the
integrated circuit design is color compatible.
January 2001 We demonstrated, with IBM, the world's first direct view OLED-on-silicon
microdisplay, which was incorporated into a computer watch which used the Linux
operation system. The microdisplay has higher resolution and higher contrast than
other similarly sized wrist-worn multi-function displays.
These achievements were recognized by The Society for Information
Display (SID) and Information Display Magazine, which designated eMagin
Corporation the winner of the prestigious 2000 SID Information Display Magazine
Display of the Year Gold Award.
17
Lens System Technology
We have developed advanced lens technology for microdisplays and
head-wearable display systems and hold key patents in these areas. Our lens
technology permits our OLED-on-silicon microdisplays to provide large field of
view images that can be viewed for extended periods with reduced eye-fatigue. We
believe that the key advantages of our lens technology are that it:
o Can be very low cost, with minimal assembly. A one piece, molded
plastic optic attached to the microdisplay can serve many
consumer end-product markets. Since our process is plastic
molding, our per unit production costs are low;
o Allows a compact and lightweight lens system that can greatly
magnify a microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high
light throughput making the display image brighter or permitting
the use of less power for an acceptable brightness;
o Can be designed to provide focusing to enable users with various
eyesight qualities to view images clearly; and
o Can provide focal plane adjustment for simultaneous focusing of
computer images and real world objects. For example, this
characteristic is beneficial for word processing or spreadsheet
applications where a person is typing data in from reference
material. This feature can make it easier for older people with
moderately poor accommodation to use a head-wearable display as a
portable computer viewing accessory.
Complementary System Technology
We have developed a wide range of technologies which complement our
core OLED and lens technologies and which we believe will enhance our
competitive position in the microdisplay and head-wearable display markets.
These include:
o Head-wearable display technology. We have developed ergonomic
technologies that make head-wearable displays easier to use in a
wide variety of applications. For example, the use of our
patented rotatable eyeblocker provides a sharp image without
requiring most users to squint. The eyeblocker can also be moved
to create an effective see-through appearance. We believe that we
have made the lightest weight, high-resolution head-wearable
display ever publicly demonstrated.
o Wireless video technology. We have developed power efficient,
miniature, video and stereo sound, radio frequency
transmitter-receiver technology as part of a government program.
This can allow consumers to watch high quality video without
wires from
18
most locations in their home using existing entertainment (e.g.,
DVD or cable/satellite systems) or data systems. We expect this
capability to greatly increase the available market and demand
for video and data head-wearable displays and we are considering
this technology for use in low cost consumer applications.
Sales and Marketing
We identify companies with products that we believe would benefit from
our display components and contact the potential customers directly. OEMs and
their end customers then develop designs, technology, and manufacturing
processes to enable them to develop products for our target markets. We plan to
provide display components and Microviewer(TM) display-optic modules for OEMs to
incorporate in their branded products and sell through established distribution
channels. We believe successful marketing will require relationships with
recognized consumer brand companies. In addition, we market head-wearable
displays directly to various vertical market channels, such as medical,
industrial, and government customers.
All activities at eMagin evolve by determining and meeting our
customers' needs. We began our work on OLED technology over four years ago
because we recognized OLED's unique ability to provide a microdisplay solution
that would satisfy the market's requirements of low cost, high resolution and
complete portability which could not be fully met with alternative technologies.
Because our microdisplays are the main functional component that defines many of
our end products, we work closely with potential customers to define our
products to optimize the final design. In addition, we define and design our
products to address common OEM requirements in order to produce optimal designs
for multiple customers.
We are developing working relationships with several OEMs that sell or
plan to sell microdisplay systems. We design our products to meet individual
customer requirements, but look for ways to leverage our design and development
costs by incorporating multiple customers' requirements into each product.
We work closely with potential customers to maximize the probability
that our microdisplay and lenses products being designed will match the
anticipated future needs of the customers. An OEM design cycle is typically
between 6 and 24 months, depending on uniqueness of the market and the
complexity of the end product. To date, this process has been handled primarily
by senior management of the company. We plan to hire additional marketing and
customer service engineers to focus on the largest customers. The marketing
staff will identify new customer needs, and help insure that the integrated
circuit and electronics designers correctly understand the customers' product
specification and delivery needs.
Developing customers in the advanced flat-panel display industry
involves primarily technical marketing and customer service. We expect that as
the market for microdisplays matures and more universal embedded systems become
commonplace, the role of traditional OEM component sales will become more
important. Our management will continually reassess the success of our marketing
and sales methodology to best meet the needs of our customers.
19
Research and Development
We have strong internal research and development capabilities, with a
staff of more than 60 people, including over 15 Ph.D.s, directly engaged in
research and development or directly supporting research and development as a
majority of their efforts. OLED technology is a relatively new technology that
has considerable room for substantial improvements in luminance, life, power
efficiency, voltage swing, design compactness, and many other parameters. We
also expect that many manufacturing cost reduction opportunities still require
new technology developments. Improving the performance, capability and cost of
our products will provide an important competitive advantage in our fast moving,
high technology marketplace. The development of improved OLED and display device
structures, developing and/or evaluating new materials (including the synthesis
of new organic molecules), manufacturing equipment and process development,
electronics design methodologies and new circuits and the development of new
lenses and related systems are all current projects at this time. We determine
research and development projects primarily by near-term customer needs. In
order to improve customer satisfaction and simultaneously maximize our margins,
we must continue to engage in intensive research and development.
External relationships play an important role in our research and
development efforts. Suppliers, equipment vendors, government organizations,
contract research groups, external design companies, customer and corporate
partners, consortia, and university relationships all enhance the overall
research and development effort and bring us new ideas. Some of the
organizations we have research and development relationships with are:
o Eastman Kodak;
o IBM;
o Covion Organic Semiconductors GmBH, a developer of OLED
materials, and
o certain research institutes in the Ukraine, including the
National Academy of Science of Ukraine.
We received a Phase III Small Business Innovation Research grant from
the US Air Force, providing $19.6 million to fund research involving the
development of high-resolution active matrix organic light emitting diode
microdisplays for incorporation into military head-mounted displays. We also
work with Eastman Kodak and Honeywell in an Air Force-sponsored dual
applications research program to develop ultra-high luminance capable and high
temperature compatible OLEDs and with the US Army Night Vision Lab to develop
active matrix organic light emitting diode technology.
20
Manufacturing Facilities
We are co-located at IBM's Microelectronics Division facility located
about 70 miles north of New York City in Hopewell Junction, New York. We lease
approximately 25,000 square feet of space housing our own equipment for OLED
microdisplay fabrication, and for research and development plus additional space
for assembly and administrative offices. We believe that our lease agreement
with IBM for a 16,300 square foot class 10 clean room space, along with
additional, lower level clean room space, and the associated acquisition of
substantial amounts of advanced manufacturing equipment at a favorable cost,
represents a substantial asset and competitive advantage. Our lease runs until
2004 and we have the option to then renew it on the same terms for an additional
five, one-year terms. Facilities services provided by IBM include cleanroom,
pure gases, high purity de-ionized water, compressed air, chilled water systems,
and waste disposal support. This infrastructure provided by our lease with IBM
provides us with many of the resources of a larger corporation without the added
overhead costs. It further allows us to focus our resources more efficiently on
our product development and manufacturing goals. We expect our facility to be
capable of producing over 50,000 SVGA+ displays per month after equipment that
has been ordered becomes fully operational. We expect this capability to be on
line in the first half of 2001 and plan capacity expansions as production orders
materialize. Further capacity expansions are planned in 2002 as production
orders materialize.
Our manufacturing process for OLED-on-silicon microdisplays can be
separated into four major areas: silicon wafer design and integrated circuit
wafer fabrication, vacuum deposition for organic layers, sealing process, and
color application. After a device is designed by a combination of internal and
external designers with customer participation, we outsource wafer fabrication.
Upon receipt of completed wafers, OLED thin film processing takes place in our
cleanroom using automated vacuum deposition processes which are set up to
deposit OLED materials on single crystal silicon substrates. An automated
cluster tool provides all OLED fabrication steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. We are in the
process of automating our color filter processing capability with the majority
of this equipment already on our cleanroom floor. In addition to processing and
packaging equipment, we possess electrical and optical instrumentation required
to characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
We lease additional non-cleanroom facilities for chemical mixing,
cleaning, distributed chemical systems, glass polishing, and glass/silicon
cutting. We also occupy a research laboratory for organic chemical synthesis
where new OLED materials are developed. OLED chemicals are also purified in this
laboratory, permitting the company to evaluate new chemicals in pilot production
that are not yet available in suitable purity for OLED applications on the
market.
Our lenses and system development operation at Virtual Vision lease
approximately 11,000 square feet of space in Redmond, Washington. The facilities
include design stations, plastics milling and preparations, lenses fabrication,
product assembly, and office space. The facilities are well suited for designing
and building limited volume prototypes and industrial or
21
government products. We plan to outsource high volume head-wearable display
production to low cost plastics, lenses, and assembly manufacturers.
Intellectual Property
We have developed a significant intellectual property portfolio of
patents, trade secrets and know-how, supported by our license from Eastman Kodak
and our current patent portfolio.
Our license from Eastman Kodak gives us the right to use, in
microdisplays, a portfolio of more than 50 patents in light emitting diode
technology, some of which are fundamental. Our agreement with Eastman Kodak
provides for perpetual access to the OLED technology for our OLED-on-silicon
applications, provided we remain active in the field and meet our contractual
requirements to Eastman Kodak.
In our relationship with Eastman Kodak, we share information regarding
improvements in the OLED technology and materials generated internally, except
where restricted by agreements with other parties. This cooperation permits us
to move our research and development forward at a fast pace without needing to
dedicate our research and development resources to certain narrow fields.
Eastman Kodak and eMagin are also parties to a government research and
development program focused on developing ultra-high brightness capable and high
temperature compatible OLEDs. Each company is developing certain types of
molecules for potential use in different parts of the OLED device structure.
In addition to more than 50 patents licensed from Eastman Kodak, we
have a portfolio of our own 55 issued patents and 55 patent applications, which
are concentrated in the following areas:
o OLED Materials, Structures, and Processes
o Display Color Processing and Sealing
o Active Matrix Circuit Methodologies and Designs
o Field Emission and General Display Technologies
o Lenses and Tracking (Eye and Head)
o Ergonomics and Industrial Design
o Wearable Computer Interface Methodology
Our patents and patent applications cover a wide range of materials,
device structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe our patent applications relating to
up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important. Our intellectual property
also covers a wide range of materials, active matrix circuit techniques and
display system designs and lenses, device structures, processes and fabrication
methods. We believe that our intellectual property portfolio, coupled with our
strategic relationships and accumulated experience in the OLED field gives us an
advantage over potential competitors.
22
Competition
We believe that our key competition will come from liquid crystal on
silicon microdisplays (LCOS), also known as reflective liquid crystal displays.
While we believe that OLED-on-silicon provides comparatively lower lenses cost,
larger apparent image size, reduced electronics cost and complexity, enhanced
color, and improved power efficiency advantages over liquid crystal on silicon
microdisplays, there is no assurance that these benefits will be realized or
that liquid crystal on silicon manufacturers will not suitably improve these
parameters. Color liquid crystal on silicon displays are currently being
sampled, and may be in production a year or more earlier than color OLED
displays, which could have a significant detrimental effect on our market
opportunity. Companies pursuing liquid crystal on silicon technology include
Colorado Microdisplay, InViso, Microdisplay Corporation, Three-Five Systems,
Silicon Display, and Spatial Light among others.
We face competition in the OLED and microdisplay industry from a
variety of companies and technologies including Agilent (USA), SEL (Japan), and
MicroEmissive Displays (Britain, a start-up company). We may also compete with
potential licensees of Universal Display Corporation, Cambridge Display
Corporation, and Uniax Corporation. Even though we could potentially license
technology from these developers, potential competitors could also obtain
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face
competition on a price and performance basis from major manufacturers such as
Sony and Seiko Epson. However, these companies use first generation liquid
crystal on polysilicon technology which we believe is not as advanced as ours,
and therefore, we believe that they may incorporate our technology into their
products when it becomes available. Laser scanning systems, including systems
being developed by Microvision Corporation, offer high brightness imaging, could
eventually be low power, and could potentially compete in high ambient light
conditions (sunlight) when a large field of view is not required. We may also
face competition from electroluminescent image system companies such as Planar.
We believe these technologies face many hurdles to becoming a high image
quality, low cost, large area full color, near-eye display.
Employees
As of December 31, 2000, we had a total of 85 employees of which 19
employees were located at Virtual Vision. Of these, 64 employees were engaged in
research and development and manufacturing operations, 6 in communications and
marketing and 15 in general administration. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
23
CERTAIN TRANSACTIONS
We were originally incorporated as Fashion Dynamics Corporation on
January 23, 1996 under the laws of the State of Nevada. For the three years
prior to March 2000, Fashion Dynamics Corporation had no active business
operations, and sought to acquire an interest in a business with long-term
growth potential. On March 16, 2000, Fashion Dynamics Corporation acquired FED
Corporation, a Delaware corporation, through the merger of its wholly-owned
subsidiary, FED Capital Acquisition Corporation, with and into FED Corporation.
In connection with the merger, Fashion Dynamics Corporation changed its name to
eMagin Corporation, which was derived from "electronic imaging," and we listed
our securities on the American Stock Exchange. FED Corporation, the operating
subsidiary of eMagin Corporation (formerly known as Fashion Dynamics
Corporation) also changed its name to eMagin Corporation.
Prior to the Merger:
o Fashion Dynamics Corporation had 20,156,400 shares of common
stock issued and outstanding.
o FED Corporation had 5,243,192 shares of common stock issued and
outstanding.
o FED Corporation had issued warrants to purchase 400,130 shares of
its common stock.
o FED Corporation had issued options to purchase 1,671,416 shares
of its common stock.
At the effective time of the Merger:
o All outstanding common shares of FED Corporation were converted
into common shares of Fashion Dynamics Corporation on a 2:1
basis.
o All outstanding warrants to acquire shares of FED Corporation
were converted into warrants to acquire shares of Fashion
Dynamics Corporation on a 2:1 basis.
o All outstanding options to acquire shares of FED Corporation were
converted into options to acquire shares of Fashion Dynamics
Corporation on a 2:1 basis.
Pursuant to rights under the terms of the merger agreement dated March
13, 2000 between the Company, FED Capital Acquisition Corporation and FED
Corporation, Citigroup/Travelers Insurance Company designated one board member,
Jack Rivkin, Verus International Ltd. designated three board members, Ajmal
Khan, Claude Charles and Martin L. Solomon and FED Corporation designated two
board members, Gary W. Jones and N. Damodar Reddy.
FED Corporation was originally incorporated in 1992 in Raleigh, North
Carolina. Its original purpose was the development and commercialization of flat
panel display technology for displaying data, information, and video. As a
result of its successful research in the area of field
24
emission displays, it was awarded approximately $13 million in government
contracts to support field emission display technology development.
In 1994, FED Corporation relocated its operations to IBM's East
Fishkill, New York campus, and purchased equipment for manufacturing and
research and development. In connection with this move, FED Corporation, a
Delaware corporation, was incorporated, and FED Corporation, a North Carolina
corporation, was merged into the Delaware corporation with the latter being the
survivor. In 1996, FED Corporation began work related to the manufacturing and
design of microdisplays based upon Eastman Kodak's small molecule, OLED
technology in combination with its own intellectual property. In 1997, FED
Corporation acquired a license from Eastman Kodak to commercialize this
technology. Since 1997, FED Corporation has applied this OLED technology to
produce high resolution microdisplay applications in which a small display is
magnified via lenses to produce a larger virtual image.
In April 1998, FED Corporation acquired Virtual Vision 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
lenses that complements its expertise in semiconductor and display technology.
In 1998 FED Corporation established a sales and marketing office in Santa Clara,
California.
On March 16, 2000, we entered into a two-year consulting agreement with
Verus International Ltd. Verus International Ltd. is a shareholder of eMagin.
Additionally, Ajmal Khan, a director of eMagin, also serves as president of
Verus International Ltd. Pursuant to the terms of the consulting agreement, we
are obligated to pay Verus International Ltd. a fee of $15,000 per month for 24
months from March 16, 2000 in consideration for Verus International Ltd.'s
advisory and consulting services offered to us.
25
RISK FACTORS
Set forth below and elsewhere in this Report and in other documents we
file with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report.
Risks Related To Our Financial Results
We have a history of losses since our inception and expect to incur losses for
the foreseeable future.
Since our inception, we have incurred significant losses and had an
accumulated loss of approximately $100.7 million as of December 31, 2000. We
have not achieved profitability and we expect to continue to incur operating
losses for the foreseeable future as we fund operating and capital expenditures
in areas such as establishment and expansion of markets, sales and marketing,
operating equipment and research and development. We cannot assure investors
that we will ever achieve or sustain profitability or that our operating losses
will not increase in the future.
We are presently dependent on U.S. government contracts.
The majority of our revenues to date have been derived from research
and development contracts with the U.S. federal government. We may continue to
rely on such contracts for revenue until volume commercial sales commence. Our
government contracts may be terminated by the government at its discretion. We
plan to submit proposals for additional development contract funding; however,
funding is subject to legislative authorization and even if funds are
appropriated such funds may be withdrawn based on changes in government
priorities. No assurances can be given that our existing contracts will
continue, that we will be successful in obtaining new government contracts, or
that programs through which our contracts are funded will continue to be funded
beyond the current fiscal year. Our inability to obtain revenues from government
contracts could have a material adverse effect on our results of operations.
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, could have a material
adverse impact on our business.
Our principal products under development utilize OLED technology that
we license from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce
key patents held by Eastman Kodak, relating to OLED display technology. Eastman
Kodak's patents expire over a range of years from 2002 to 2020. Our license with
Eastman Kodak could terminate if we fail to perform any material term or
covenant under the license agreement. Since our license from Eastman Kodak is
non-exclusive, Eastman Kodak could also elect to become a competitor itself or
to license its OLED technology for microdisplay applications to others who have
the potential
26
to compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
We may not be successful in protecting our intellectual property and proprietary
rights.
We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, and protection of our intellectual property rights may be limited in
certain foreign countries. We may be required to expend significant resources to
monitor and police our intellectual property rights.
Any future infringement or other claims or prosecutions related to our
intellectual property could have a material adverse effect on our business. Any
such claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, or require us to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all.
Risks Related To The Microdisplay Industry
The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products.
The market for microdisplays is emerging. Our success will depend on
consumer acceptance of microdisplays as well as the success of the
commercialization of the microdisplay market. At present, it is difficult to
assess or predict with any assurance the potential size, timing and viability of
market opportunities for our technology in this market. The viewfinder
microdisplay market sector is well established with entrenched competitors who
we must displace.
The microdisplay systems business is intensely competitive.
We do business in intensely competitive markets that are characterized
by rapid technological change, changes in market requirements and competition
from both other suppliers and our potential OEM customers. Such markets are
typically characterized by price erosion. This intense competition could result
in pricing pressures, lower sales, reduced margins, and lower market share. Our
ability to compete successfully will depend on a number of factors, both within
and outside our control. We expect these factors to include the following:
o our success in designing, manufacturing and delivering expected
new products, including those implementing new technologies on a
timely basis;
27
o our ability to address the needs of our customers and the quality
of our customer services;
o the quality, performance, reliability, features, ease of use and
pricing of our products;
o successful expansion of our manufacturing capabilities;
o our efficiency of production, and ability to manufacture and ship
products on time;
o the rate at which original equipment manufacturing customers
incorporate our product solutions into their own products;
o the market acceptance of our customers' products; and
o product or technology introductions by our competitors.
Our competitive position could be damaged if one or more potential OEM
customers decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
Competing products may get to market sooner than ours.
Our competitors are investing substantial resources in the development
and manufacture of microdisplay systems using alternative technologies such as
reflective LCDs, LCD-on-Silicon ("LCOS") microdisplays (Colorado Microdisplay,
Inc., InViso Inc., The Microdisplay Corporation, Three-Five Systems, Inc.,
Silicon Display and SpatiaLight, Inc. among others), active matrix
electroluminescence and scanning image systems (Planar Systems, Inc. and
Microvision Inc.) and transmissive AMLCD (Sony Corporation, Seiko Epson
Corporation, and Kopin Corporation). Color LCOS displays are currently in
initial production, and may be in volume production a year or more earlier than
our microdisplays, which could have a significant detrimental effect on our
market opportunity.
Our competitors have many advantages over us.
We expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical and marketing resources
than us, as well as emerging companies attempting to obtain a share of the
various markets for which our microdisplay products have the potential to
compete.
Our products are subject to lengthy OEM development periods.
We plan to sell most of our microdisplays to OEMs who will incorporate
them into products they sell. OEMs determine during their product development
phase whether they will incorporate our products. The time elapsed between
initial sampling of our products by OEMs, the custom design of our products to
meet specific OEM product requirements, and the ultimate
28
incorporation of our products into OEM consumer products could be significant.
If our products fail to meet our OEM customers' cost, performance or technical
requirements or if unexpected technical challenges arise in the integration of
our products into OEM consumer products, our operating results could be
significantly and adversely affected. Long delays in achieving customer
qualification and incorporation of our products could adversely effect our
business.
Our products will likely experience rapidly declining unit prices.
In the markets in which we expect to compete, prices of established
products tend to decline significantly over time. In order to maintain our
profit margins over the long term, we believe that we will need to continuously
develop product enhancements and new technologies that will either slow price
declines of our products or reduce the cost of producing and delivering our
products. While we anticipate many opportunities to reduce production costs over
time, there can be no assurance that these cost reduction plans will be
successful. We may also attempt to offset the anticipated decrease in our
average selling price by introducing new products, increasing our sales volumes
or adjusting our product mix. If we fail to do so, our results of operations
would be materially and adversely affected.
Risks Related To Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services.
We do not manufacture our silicon integrated circuits on which we
incorporate the OLED. Instead, we expect to provide the design layouts to
semiconductor contract manufacturers who will manufacture the integrated
circuits on silicon wafers. We also expect to depend on suppliers of a variety
of other components and services, including circuit boards, graphic integrated
circuits, passive components, materials and chemicals, and equipment support.
Our inability to obtain sufficient quantities of high quality silicon integrated
circuits or other necessary components, materials or services on a timely basis
could result in manufacturing delays, increased costs and ultimately in reduced
or delayed sales or lost orders which could materially and adversely affect our
operating results.
We have not manufactured OLED-on-silicon products in commercial quantities and
we do not know if our manufacturing yields will be commercially viable.
In order for us to be successful as a product or component
manufacturer, our products must be manufactured to meet high quality standards
in commercial quantities at competitive prices. We have not begun commercial
production on any of our OLED-based products and we do not currently have the
capability to manufacture products in commercial quantities. The manufacture of
OLED-on-silicon is new and OLED microdisplays have not been produced in
significant volumes. We expect to begin commercial production during 2001 to
meet anticipated demand for our products. If we are unable to produce our
products in sufficient quantity, we will be unable to attract customers. In
addition, we cannot assure you that once we commence volume production we will
attain yields that will result in profitable gross margins or that we will
29
not experience manufacturing problems which could result in delays in delivery
of orders or product introductions.
We are dependent on a single manufacturing line.
We initially expect to manufacture our products on a single
manufacturing line. If we experience any significant disruption in the operation
of our manufacturing facility we may be unable to supply microdisplays to our
customers. For this reason, some OEMs may also be reluctant to commit a broad
line of products to our microdisplays without a second production facility in
place. Interruptions in our manufacturing could be caused by manufacturing
equipment problems, the introduction of new equipment into the manufacturing
process or delays in the delivery of new manufacturing equipment. Lead time for
delivery of manufacturing equipment can be extensive. No assurance can be given
that we will not lose potential sales or be unable to meet production orders due
to production interruptions in our manufacturing line.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business.
We are dependent upon the active participation of several key
management personnel including Gary W. Jones, our Chief Executive Officer and
Susan K. Jones, our Executive Vice President who are married to each other.
While we currently maintain a key employee insurance policy on our CEO, we may
elect to discontinue this insurance at any time. We also need to recruit
additional management personnel in order to expand according to our business
plan. The failure to attract and retain additional management personnel could
have a material adverse effect on our operating results and financial
performance.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel.
We must hire highly skilled technical personnel as employees and as
independent contractors in order to develop our products. The competition for
skilled technical employees is intense and we may not be able to retain or
recruit such personnel. We must compete with companies that possess greater
financial and other resources than we do, and that may be more attractive to
potential employees and contractors. To be competitive, we may have to increase
the compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a materially adverse affect on our business
and our operating results. In addition, difficulties in hiring and retaining
technical personnel could delay the implementation of our business plan.
Our business depends on new products and technologies.
The market for our products is characterized by rapid changes in
product, design and manufacturing process technologies. Our success depends to a
large extent on our ability to develop and manufacture new products and
technologies in order to establish a competitive position and become profitable.
Furthermore, we must adopt our products and processes to
30
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology.
Our prospects will be significantly affected by our ability to develop
strategic alliances with OEMs for incorporation of our OLED-on-silicon
technology into their products. While we intend to continue to establish
strategic relationships with manufacturers of electronic consumer products,
personal computers, chipmakers, lens makers, equipment makers, material
suppliers and/or systems assemblers, there is no assurance that we will be able
to continue to establish and maintain strategic relationships on commercially
acceptable terms, or at all. Failure to do so would have a material adverse
effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow may be limited.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including our success in completing the
development of our products, manufacturing and marketing our products and
competing technological and market developments. We may not be able to generate
sufficient cash from our operations to meet additional working capital
requirements, support additional capital expenditures or take advantage of
acquisition opportunities. In addition, substantial additional capital may be
required in the future to fund product development and product launches. No
assurance can be given that additional financing will be available or that, if
available, such financing will be obtainable on terms favorable to us or our
shareholders. To the extent we raise additional capital by issuing equity or
securities convertible into equity, our current shareholders will suffer
dilution in ownership. If needed capital is unavailable, our ability to continue
to operate and grow our business could be adversely affected.
Our business exposes us to product liability claims.
Our business exposes us to potential product liability claims. Although
no such claim has been brought against us to date, and to our knowledge no such
claim is threatened or likely, we may face liability to product users for
damages resulting from the faulty design or manufacture of our products. While
we maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
31
Our business is subject to environmental regulations and possible liability
arising from potential employee claims of exposure to harmful substances used in
the development and manufacture of our products.
We are subject to various governmental regulations related to toxic,
volatile, experimental and other hazardous chemicals used in our design and
manufacturing process. Our failure to comply with these regulations could result
in the imposition of fines or in the suspension or cessation of our operations.
Compliance with these regulations could require us to acquire costly equipment
or to incur other significant expenses.
We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials we can not assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock.
A large percentage of our outstanding common stock (approximately 35%)
is owned by current and former directors and officers of eMagin Corporation or
their affiliates. If these shareholders were to vote together, they could
significantly influence the outcome of items that are submitted to a vote of the
shareholders including the election of our directors.
We cannot forecast our future performance.
We cannot accurately forecast our revenues because of our limited
commercial operating history and because the OLED microdisplay market is only
beginning to emerge. We may experience significant fluctuations in our quarterly
operating results due to many factors which are outside our control. These
factors include:
o fluctuation in demand and orders for our products;
o timing or cost of future supply or equipment deliveries;
o manufacturing capacity and yields;
o variations in product and process development costs;
o expenses or operational disruptions resulting from acquisitions;
o activities of our competitors; and
o general economic conditions.
Due to these factors, we cannot anticipate with any degree of certainty what our
revenues, if any, will be in future periods. You have limited historical
financial data and operating results with which to evaluate our business and our
prospects. As a result, you should consider our prospects in light of the
expense, difficulties and delays frequently encountered by early stage companies
formed to pursue development of new technologies.
32
Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation.
Our common stock has experienced substantial price volatility. In
addition, the stock market has experienced extreme price and volume fluctuations
that have affected the market price of many technology companies, in particular,
and that have often been unrelated to the operating performance of these
companies. These factors, as well as general economic and political conditions,
may materially adversely affect the market price of our common stock in the
future. Accordingly, investors in our common stock may experience a decrease in
the value of their common stock regardless of our operating performance or
prospects.
In addition, the trading price of our common stock could be subject to
wide fluctuations in response to:
o our perceived prospects;
o quarter to quarter variations in our operating results;
o changes in earnings estimates or recommendations by securities
analysts and market perceptions of our operating results in
relation to those estimates or recommendations;
o changes in market valuation of companies in the microdisplay
systems industry;
o announcements of technological innovations or new products by us
or our competitors;
o sales of shares by existing shareholders; and
o general conditions in the personal products industries or stock
market conditions.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in their share price. Those
companies, like us, that are involved in rapidly changing technology markets are
particularly subject to this risk. This type of litigation, if instituted
against us, could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business.
ITEM 2: PROPERTIES
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 45,000 square feet of space,
all of which is located in the same industrial park. Approximately 25,000 square
feet of space houses our own equipment for OLED microdisplay fabrication, and
for research and development plus additional space for assembly operations.
Approximately 20,000 square feet of space is used for administrative offices.
Our lease runs until 2004 and we have the option to then renew it on the same
terms for an additional five, one-year terms.
33
We occupy 2,200 square feet of office space located in Santa Clara,
California under a lease agreement, which expires in January 2002.
Our lenses and system development operation at Virtual Vision lease
approximately 11,000 square feet of space in Redmond, Washington. The lease for
this facility runs until June 2002.
eMagin Corporation's telephone number is (845) 892-1900. Our website
address is www.eMagin.com.
ITEM 3: Legal Proceedings
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the Fiscal Year covered by this Report.
34
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the American Stock Exchange under
the symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000
our common stock had been quoted on the OTC Bulletin Board under our prior name
"Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there
had been no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchange and the OTC Bulletin Board. With respect
to OTC Bulletin Board quotes, these prices reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
High Low
---- ---
2000
First Quarter (through March 16, 2000)..................20.625 5.938
First Quarter (since March 17, 2000)....................22.938 19.500
Second Quarter..........................................20.250 8.500
Third Quarter...........................................13.000 7.875
Fourth Quarter.......................................... 9.750 2.040
As of March 1, 2001, there were 25,069,143 shares of common stock outstanding
and 515 holders of record.
We have never declared nor paid cash dividends on our capital stock. We
intend to retain future earnings, if any, for the development and operation of
our business, and do not anticipate paying any cash dividends in the foreseeable
future. Any determination whether to pay dividends will depend on a number of
factors, including our results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal and regulatory restrictions on the payment of
dividends and other factors that our Board of Directors deems relevant. There
are no restrictions that currently limit our ability to pay dividends on our
common stock.
35
ITEM 6: SELECTED FINANCIAL DATA
You should read the following selected financial data together with
Item 7 entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements including accompanying
notes, and other financial information, all of which are included elsewhere in
this report. The selected financial data for the fiscal years ended December 31,
1996, 1997, 1998, 1999, and 2000 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent
auditors. The historical results are not necessarily indicative of results to be
expected for any future period.
Prior to the acquisition of FED Corporation, Fashion Dynamics
Corporation had no active business operations. Management believes that the
comparison of eMagin's financial results to that of the operating entity (FED
Corporation) provides the most meaningful comparative information to the reader.
Accordingly, the comparative information that follows, reflects the operating
results of FED Corporation for all periods prior to the merger and it should be
read in conjunction with the consolidated financial statements and notes thereto
of this Form 10-K.
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1996 1997 1998 1999 2000 (1)
------ -------- --------- ---------- -----------
(unaudited)
Statement of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Net Contract Revenues............... $224 $3,626 $6,154 $1,895 $3,126
------ -------- --------- ---------- -----------
Total revenue................ 224 3,626 6,154 1,895 3,126
Costs and Expenses:
Research and Development
(net of funding under cost
sharing arrangements) .............. 4,323 5,234 10,250 10,171 11,815
Non-cash expense for
conversion of debt to
common stock ....................... -- -- -- 1,917 --
Non-cash stock-based
compensation........................ -- -- -- -- 10,319
Amortization of purchase
intangibles......................... -- -- -- -- 20,932
Acquired in-process
research and development ........... -- -- -- -- 12,820
General and Administrative.......... 2,038 2,015 3,514 5,203 6,145
------ -------- --------- ---------- -----------
Loss from operations.................. (6,137) (3,623) (7,610) (15,396) (58,905)
------ -------- --------- ---------- -----------
36
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1996 1997 1998 1999 2000 (1)
------ -------- --------- ---------- -----------
(unaudited)
Other income (expense)................ 115 (107) (122) (404) (2,616)
------ -------- --------- ---------- -----------
Net loss.............................. (6,022) (3,730) (7,732) (15,800) (61,521)
------ -------- --------- ---------- -----------
Basic and diluted net $ (1.12) $(.69) $(1.42) $(6.04) $(2.95)
loss per share........................
Weighted average shares
outstanding used in basic
and diluted per-share
calculation......................... 5,396,729 5,437,537 5,450,293 2,614,743 22,144,904
(1) The summary financial data for the year ended December 31, 2000
represent a pro forma presentation of the results for this period, containing
the operating results of eMagin Corporation for the year ended December 31,
2000, with the operating results of FED Corporation for the period from January
1, 2000 through March 15, 2000, in order to present operating results for the
year period for comparative purposes.
As of December 31
---------------------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
Balance Sheet Data: (IN THOUSANDS)
Working capital (deficit)................ $7,810 $ 2,888 $ 3,371 $(3,295) $ 6,243
Total assets............................. 10,334 6,906 11,163 5,038 62,549
Current maturities of long-term debt..... -- -- 62 269 313
Short-term debt.......................... -- -- -- 2,127 --
Total shareholders' equity .............. $ 4,718 $ 1,016 $ 4,693 $60 $ 59,184
37
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and the notes to those statements and other financial information
appearing elsewhere in this report. Our fiscal year ends December 31.
Overview
We are a leading developer of OLED-on-silicon microdisplays and optics
systems. Our fundamental expertise is in combining low cost integrated circuits
with flat, emissive display technologies to provide high quality imaging systems
in a thin, lightweight format with features we believe to be superior to
existing microdisplay technologies. We are planning to begin commercial
manufacturing and distribution of our products and technology as components to
OEM system manufacturers for near-eye and headset applications in products such
as entertainment and gaming headsets, handheld Internet and telecommunication
appliances, and wearable computers.
eMagin Corporation was originally incorporated as Fashion Dynamics
Corporation on January 23, 1996 under the laws of the State of Nevada. For the
three years prior to the merger, Fashion Dynamics Corporation had no active
business operations, and sought to acquire an interest in a business with
long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation
acquired FED Corporation (derived from field emissive device), subsequently
changed its name to eMagin Corporation (derived from "electronic imaging") and
listed its common stock on the American Stock Exchange under the "EMA" trading
symbol.
Under the terms of the merger, Fashion Dynamics Corporation issued
approximately 10.5 million shares of its common stock to FED Corporation
shareholders and issued approximately 3.9 million options and warrants in
exchange for existing FED options and warrants. The total purchase price of the
transaction was approximately $98.5 million, including $73.4 million of value
relating to the shares issued (at a fair value of $7 per share, the value of a
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged and $3.8 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 were recorded based upon their fair values at the date of
acquisition as determined by an independent appraisal.
The purchase price was allocated as follows: (in millions)
Deferred compensation $13.0
In-process research and development 12.8
Fixed assets 1.2
Other intangible assets 16.9
Goodwill 54.6
----
$98.5
-----
38
We amortize goodwill and other intangible assets acquired over their
estimated useful lives of three years. We recorded approximately $20.9 million
in amortization expense related to purchased intangible assets for the year
ended December 31, 2000. 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 are to be charged to expense as part of
the allocation of purchase price. The amount allocated to acquired in-process
research and development related to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility and may not develop into
products that may be sold by us.
For the three years prior to the acquisition of FED Corporation,
Fashion Dynamics Corporation had no active business operations. Management
believes that the comparison of eMagin's financial results to that of the
operating entity (FED Corporation) provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
reflects the operating results of FED Corporation for all periods prior to the
merger and it should be read in conjunction with the consolidated financial
statements and notes thereto of this prospectus. The comparison of financial
information below for the period ended December 31, 2000 reflects pro forma
results of eMagin for the period January 1, 2000 through December 31, 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 year of operations for each period. Reference is made to our
consolidated financial statements that are included herein for further detail on
the results of eMagin and FED Corporation for their respective periods of
ownership.
Our history has been as a developmental stage company. We intend to
significantly increase our marketing, sales, and research and development
efforts, and expand our operating infrastructure. Most of our operating expenses
will be fixed in the near term. If we are unable to generate significant
revenues, our net losses in any given quarter could be greater than expected. As
a result, you should consider our prospects in light of the early stage of our
business in a new and rapidly evolving market.
The following are descriptions of the revenue and expense components of
our statement of operations:
Net contract revenues currently represent revenues mostly from
contracts funded by U.S. government programs. We have historically earned
revenues from certain of our 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. The
amount of revenues earned is dependent upon the execution of new government
contracts, which may not be predictable or consistent from period to period
because
39
of variations in government funds allocated to research and development in our
field of technology.
Research and development expenses represent salaries, development
materials, external contracts, equipment lease and depreciation expense,
electronics, rent, utilities and costs associated with operating our
manufacturing facility. These costs are expensed as incurred. We have received
cost sharing awards from certain U.S. government agencies to fund certain
research and development. Funding from this type of contract is recognized as a
reduction in research and development operating expenses during the period in
which the services are performed and related direct expenses are incurred. As of
December 31, 2000, the remaining amounts to be incurred and billed on these
active "cost sharing" contracts totaled $1.4 million.
Non-cash stock-based compensation expense represents expenses
associated with stock option grants to our officers and employees at below fair
market value as additional compensation for their services and to induce them to
lock-up their options for a longer time then would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
Amortization of purchased intangibles represents the cost of
amortization of the value of goodwill and other acquired intangible assets. The
purchased intangibles are amortized over their expected useful lives of three
years on a straight-line basis.
Selling, general and administrative expenses principally represent the
cost of salaries and fees for professional services, legal fees incurred in
connection with patent filings and related matters, depreciation and
amortization, and other administrative expenses as well as expenses associated
with marketing.
Basic and diluted net loss per common share is computed by using the
weighted average number of shares of common stock outstanding during the period,
restated for the effect of the merger upon the number of shares outstanding in
the current year, and for the presentation of the net loss per share for the
predecessor, a stock split effected during 1999. No common stock equivalents
have been included in the computation of weighted average shares outstanding, as
their effect would be anti-dilutive.
40
Results of Operations
Comparison of our financial results for the years ended December 31,
1998, 1999 and 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased to $3.1 million for the year ended December 31, 2000
from $1.9 million for the year ended December 31, 1999, representing an increase
of 63%. This increase was due primarily to the recognition of revenue from
certain government contracts relating to head-wearable displays.
Research and Development Expenses
Gross research and development expenses increased to $13.3 million for
the year ended December 31, 2000 from $11.2 million for the year ended December
31, 1999, representing a 17.7% increase. Of these amounts, we received $1.5
million in cost sharing from the U.S. government for the year ended December 31,
2000, and $1.1 million for the year ended December 31, 1999. The $2.1 million
increase in gross expenses for the year ended December 31, 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 our manufacturing facility.
Non-Cash Stock-Based Compensation Expense
Non-cash stock-based compensation expense was $10.3 million for the
year ended December 31, 2000 versus no activity for the year ended December 31,
1999. The activity, for the year ended December 31, 2000, reflects the
amortization of deferred compensation costs related to the issuance of stock
options, warrants issued and re-priced warrants and options at below fair market
values in the first quarter of 2000.
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense increased to $20.9
million for the year ended December 31, 2000 from $0.8 million for the year
ended December 31, 1999. The $20.1 million increase in amortization for
purchased intangibles expense is the result of non-cash charges related to the
amortization of goodwill and intangibles created by the merger.
Acquired In-Process Research and Development
In connection with the merger, we allocated $12.8 million of the
purchase price to acquired in-process research and development. Accordingly,
these costs were expensed during the year upon finalization of a third party
appraisal.
41
General and Administrative Expenses
General and administrative expenses increased to $6.1 million for the
year ended December 31, 2000 from $5.2 million for the year ended December 31,
1999, representing a 17.3% increase. The $0.9 million increase in selling,
general and administrative expenses was due primarily to increases in marketing
activity, personnel costs, travel and patent filings.
Other Income (Expense)
Other expenses increased to $2.6 million for the year ended December
31, 2000 from $0.4 million for the year ended December 31, 1999. The increase of
$2.2 million was due primarily to the amortization of the debt discount from the
beneficial conversion of a bridge loan entered into by us prior to the merger.
Net Loss Per Common Share
The following provides a reconciliation of information used in
calculating the per share amounts for the year ended December 31, 2000 and
December 31, 1999. The 1999 loss attributable to common shareholders includes an
effect of an induced conversion of convertible preferred stock that took place
in June 1999.
2000 1999
---- ----
Loss attributable to common shareholders
Net loss $(61,521,866) $(15,800,245)
------------ ------------
Effect of induced conversion of
Convertible Preferred Stock (7,576,862)
------------ ------------
Loss attributable to common shareholders $(61,521,866) $(23,377,107)
============ ============
Weighted average shares outstanding 22,144,904 2,614,743
Basic and diluted loss per common share $ (2.78) $ (8.94)
============ ============
42
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Revenues decreased to $1.9 million in 1999 from $6.2 million in 1998,
representing a 69% decrease. Revenues were lower due to reduced U.S. government
contract volume as a contract was completed during 1999 and the type of U.S.
government contract we engaged in changed primarily to "cost sharing" from
"cost-plus-fee" contracts.
Research and Development Expenses
Gross research and development expenses decreased to $11.3 million in
1999 from $11.5 million in 1998, representing a 2% decrease. The $0.2 million
decrease for 1999 reflects lower direct material costs. Of these amounts, we
received $1.1 million in cost sharing from the U.S. government for 1999 and $1.3
million in 1998. As of December 31, 1999, the remaining amounts to be incurred
and billed on four active "cost sharing" contracts totaled $3.3 million.
Non-Cash Expense For Conversion of Debt to Common Stock
In 1999, we recorded a non-cash charge of $1.9 million for the
conversion of $4.0 million of senior debt to 1,449,276 shares of common stock,
which reflected a benefit the bondholder received at the date of conversion of
the fair market value of the common stock over the contractual conversion price.
General and Administrative Expenses
General and administrative expenses increased to $5.2 million in 1999
from $3.5 million in 1998, representing a 49% increase. The increase in general
and administrative expenses was primarily related to the establishment of a
sales and marketing office in Santa Clara, California and additional patent
filings.
Other Income (Expense)
Other expenses increased to $0.4 million in 1999 from $0.1 million in
1998. The increase of $0.3 million was due to higher interest rates and a lower
cash balance than in 1998.
Net Loss
The net loss increased to $15.8 million in 1999 from $7.7 million in
1998.
Liquidity and Capital Resources
Our cash requirements depend on numerous factors, including completion
of our product development activities, ability to commercialize our products,
market acceptance of our products and other factors. We expect to devote
substantial capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train
43
additional staff, expand our research and development activities, develop and
expand our manufacturing capacity and begin production activities. Through
December 31, 2000 we have incurred accumulated losses of approximately $100.7
million since our inception and we anticipate incurring significant losses as we
fund our growth. Since inception we have financed our operations through private
placements of equity securities, research and development contracts and
borrowings. As of December 31, 2000, we had $7.4 million in cash and cash
equivalents.
Net cash used in operating activities was $14.5 million for the year
ended December 31, 2000. Cash used in operating activities resulted primarily
from our net loss partially offset by increases from non-cash charges. Cash used
in operating activities for 1999 was $8.6 million and $6.3 million in 1998
resulting primarily from operating losses.
Net cash provided by investing activities was $0.4 million for the year
ended December 31, 2000. This represented net cash acquired in acquisition of
$1.2 million, offset by capital expenditures of $0.8 million. Net cash used by
investing activities in 1999 was $0.3 million primarily for capital
expenditures. In 1998, net cash used in investing activities was $1.2 million
primarily for capital expenditures and the acquisition of Virtual Vision.
Net cash provided by financing activities was $22.0 million for the
year ended December 31, 2000, and consisted primarily of proceeds from the
issuance of common stock in a private placement of $22.5 million offset by
decreases in short term debt and capital leases of $0.5 million. Cash provided
by financing activities for 1999 was $7.7 million primarily from the issuance of
short-term debt and the issuance of preferred stock. In June of 1999, all of the
preferred shareholders voted to convert their shares into common stock at
conversion rates that ranged between 2.8 to 5.5 shares of common stock for each
share of preferred stock. Cash provided by financing activities for 1998 was
$6.9 million primarily from the issuance of preferred stock.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future and that our
operating expenses will be a material use of our cash resources.
We expect that we will need to raise additional equity or debt
financing in the future. There can be no assurance that additional equity or
debt financing will be available on acceptable terms or at all. If we are unable
to obtain additional capital, we may be required to reduce the scope of our
planned product development, selling and marketing activities and expansion of
our manufacturing facilities, which would have a material adverse effect on our
business, financial condition and operating results. In the event that we raise
additional equity financing, further dilution to investors could result.
44
Unaudited Quarterly Results of Operations for the Years Ended
December 31, 2000 and 1999
Year ended December 31, 2000
----------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $12,266 $828,394 $1,011,763 $705,164
Net loss (2,257,156) (11,004,386) (24,036,650) (10,868,625)
Net loss per share
Basic and diluted $(0.17) $(0.44) $(0.96) $(0.43)
Year ended December 31, 1999
----------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Revenues $ -- $ -- $ -- $ --
Net loss (326) (3,327) (2,027) (12,772)
Net loss per share
Basic and diluted $ -- $(0.0005) $(0.0003) $(0.002)
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No.138 "Accounting for Certain Derivative Instrument and Certain Hedging
Activities," which amends the accounting and reporting standards of SFAS No.
133, "Accounting for Derivatives and Hedging Activities." The Statement
establishes accounting and reporting standards for derivative instruments
(including certain derivative instruments embedded in other contracts) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning
after June 15, 2000 (as amended by SFAS No. 137) and will not require
retroactive restatement of prior-period financial statements. Management
believes the adoption of SFAS 133 will not have a material impact on the
Company.
In March 2000, the FASB issued interpretation (FIN) No. 44, "Accounting
for Certain Transactions Involving Stock Compensation-An Interpretation of APB
Opinion No. 25." Among other things, FIN 44 clarifies the definition of
employees, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain of its conclusions cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
adopted the provisions of FIN 44 as of July 1, 2000.
45
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's cash equivalents and investment
securities are at fixed interest rates, and as such, the fair market value of
these instruments is affected by changes in market interest rates. As of
December 31, 2000, all of the Company's cash equivalents and investment
securities mature within one year. Accordingly, we believe that the market risk
arising from our holdings of these financial instruments is immaterial. However,
in the future, we may invest in securities with maturities of more than one
year, which may carry greater interest rate risk. Presently, all of the
Company's research and development contract payments are made in U. S. dollars
and, consequently, we believe we have no direct foreign currency exchange rate
risk. However, in the future, we may enter into contracts in foreign currencies,
which may subject the Company to foreign exchange rate risk. We do not have any
derivative instruments and do not presently engage in hedging transactions.
46
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT INDEX
Page
----
FINANCIAL STATEMENTS FOR EMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
Report of Independent Public Accountants (Arthur Andersen LLP).............................................. 48
Report of Independent Public Accountants (Barry L. Friedman)................................................ 49
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 .................................. 50
Consolidated Statements of Operations for the years ended December 31, 2000, 1999, 1998 and for the
period from inception (January 23, 1996) through December 31, 2000 ..................................... 51
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999, 1998, and 1997
and the period from inception (January 23, 1996) to December 31, 1996................................... 52
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, 1998 and for the
period from inception (January 23, 1996) through December 31, 2000 ..................................... 53
Notes to Consolidated Financial Statements.................................................................. 55
FINANCIAL STATEMENTS FOR FED CORPORATION (PREDECESSOR)
Report of Independent Public Accountants.................................................................... 66
Consolidated Balance Sheets as of December 31, 1999......................................................... 67
Consolidated Statements of Operations for the period from January 1, 2000 to
March 15, 2000 (unaudited), the years ended December 31, 1999 and 1998 and for the period from
inception (January 6, 1992) through December 31, 1999................................................... 68
Consolidated Statements of Changes in Stockholders' Equity for the period from inception to December
31, 1992 and each of the seven years ended December 31, 1999............................................ 69
Consolidated Statements of Cash Flows for the period from January 1, 2000 to
March 15, 2000 (unaudited), the years ended December 31, 1999 and 1998 and for the period from
inception (January 6, 1992) through December 31, 1999................................................... 73
Notes to Consolidated Financial Statements.................................................................. 75
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated balance sheet of eMagin
Corporation (a Nevada corporation in the development stage; see Note 1) and
subsidiaries as of December 31, 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended and the
related consolidated statements of operations, shareholder's equity and cash
flows for the period from inception (January 23, 1996) to December 31, 2000.
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 audit. We did not audit the financial statements of eMagin Corporation
for the period from inception to December 31, 1999. Such statements are included
in the cumulative from inception to December 31, 2000 totals of the statements
of operations, shareholder's equity and cash flows and reflect a total net loss
of less than a percent of the related cumulative totals. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts from the period from inception to
December 31, 1999, included in the cumulative totals, is based solely upon the
reports of the other auditors.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of eMagin Corporation and subsidiaries as of December 31,
2000, and the results of their operations and their cash flows for the year then
ended, and for the period from inception to December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations since inception raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
New York, New York Arthur Andersen LLP
February 28, 2001
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
FASHION DYNAMICS CORP.:
I have audited the accompanying Balance Sheets of FASHION DYNAMICS CORP. (A
Development Stage Company), as of December 31, 1999 and the related statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audits in accordance with generally accepted auditing standards.
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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of FASHION DYNAMICS CORP. (A
Development Stage Company), as of December 31, 1999 and the results of its
operations and cash flows for the years ended December 31, 1999 and December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has no
established source of revenue. This raises substantial doubt about its ability
to continue as a going concern. Management's plan in regard to these matters is
described in Note 1. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Barry L. Friedman
Certified Public Accountant
1582 Tulita Drive
Las Vegas, NV 89123
702-361-8414
Las Vegas, Nevada
February 17, 2000
Where Barry L. Friedman, CPA is not the accountant for the most recent fiscal
year ended, and he has audited one or more of the prior fiscal years. Barry L.
Friedman was a sole practitioner in his capacity as the Company's previous
auditor. This represents a copy of Barry L. Freidmans's previously issued
report, which he is unable to reissue in accordance with Rule 2-02(a) of
Regulation S-X due to his untimely demise, and hence, no longer in practice.
49
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 7,367,257 --
Contract receivables ............................ 825,733 --
Costs and estimated profits in excess of billings
on contracts in progress ..................... 627,347 --
Prepaid expenses and other current assets ....... 665,222 --
------------- -----------
Total current assets ............... 9,485,559 --
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net ........... 1,268,304 --
GOODWILL AND PURCHASED INTANGIBLES, net ............. 51,689,938 --
OTHER LONG-TERM ASSETS .............................. 105,394 --
------------- -----------
Total assets ....................... $ 62,549,195 $ --
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $ 161,025 $ --
Accrued payroll ........................................... 1,376,888 --
Accrued expenses .......................................... 935,746 --
Advance payments on contracts to be completed ............. 311,812 --
Current portion of long-term debt ......................... 313,074 --
Other current liabilities ................................. 144,000 --
------------- -----------
Total current liabilities .................... 3,242,545 --
------------- -----------
LONG-TERM DEBT ................................................ 122,984 --
------------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 40,000,000 and
25,000,000 shares authorized, 25,069,143 and
20,156,400 shares issued and outstanding,
respectively ........................................... 25,069 20,156
Additional paid-in capital ................................ 116,622,811 10,844
Deferred compensation ..................................... (9,266,397) --
Deficit accumulated during the development stage .......... (48,197,817) (31,000)
------------- -----------
Total shareholders' equity ................... 59,183,666 --
------------- -----------
Total liabilities and shareholders'
equity .................................... $ 62,549,195 $ --
============= ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
50
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from
inception (January 23, 1996) to December 31, 2000
Period from
Inception
(January 23,
1996) to
December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
CONTRACT REVENUES ................... $ 2,557,587 $ -- $ -- $ 2,557,587
------------ ------------ ------------ ------------
Total revenues ........ 2,557,587 -- -- 2,557,587
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development, net of
funding under cost sharing
arrangements of $1,328,121,
$0, and $0, respectively ..... 9,634,948 -- -- 9,634,948
General and administrative ...... 5,149,513 18,452 3,477 5,180,513
Amortization of purchased
intangibles .................. 20,932,320 -- -- 20,932,320
Acquired in-process research and
development .................. 12,820,000 -- -- 12,820,000
Non-cash stock based
compensation ................ 2,539,828 -- -- 2,539,828
------------ ------------ ------------ ------------
Total costs and expenses,
net ................ 51,076,609 18,452 3,477 51,107,609
------------ ------------ ------------ ------------
OTHER INCOME, NET ................... 352,205 -- -- 352,205
------------ ------------ ------------ ------------
Net loss .............. $(48,166,817) $ (18,452) $ (3,477) $(48,197,817)
============ ============ ============ ============
Basic and diluted loss per share .. $ (2.18) $ (0.00) $ (0.00)
Basic and diluted weighted average
shares outstanding .............. 22,144,904 21,156,400 21,156,400
The accompanying notes are an integral part of these consolidated statements.
51
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 23, 1996) to DECEMBER 31, 1996 and FOR
EACH of the FOUR YEARS ENDED DECEMBER 31, 1997, 1998, 1999, AND 2000
Deficit
Accumulated
Additional during the
Number of $0.001 par Paid- in Deferred development
Shares value Capital Compensation stage Total
-------------------------------------------------------------------------------------
February 6, 1996
Issued for Cash 600,000 600 5,400 - - 6,000
Net loss, January 23, 1996
(Inception) to
December 31, 1996 - - - - (3,803) (3,803)
-------------------------------------------------------------------------------------
Balance, December 31, 1996 600,000 600 5,400 - (3,803) 2,197
Issuance of Common Stock for cash 500,000 500 24,500 - - 25,000
Net loss - - - - (5,268) (5,268)
-------------------------------------------------------------------------------------
Balance, December 31, 1997 1,100 000 1,100 29,900 - (9,071) 21,929
Effect of stock split 5,500,000 5,500 (5,500) - - -
Net loss - - - - (3,477) (3,477)
-------------------------------------------------------------------------------------
Balance, December 31, 1998 6,600,000 6,600 24,400 - (12,548) 18,452
Effect of stock split 13,556,400 13,556 (13,556) - - -
Net loss - - - - (18,452) (18,452)
-------------------------------------------------------------------------------------
Balance, December 31, 1999 20,156,400 20,156 10,844 - (31,000) -
Sale of common stock in private
placement, net of issuance
costs of $1,000,000 3,464,547 3,465 23,246,535 - - 23,250,000
Common stock issued and options and
warrants exchanged in connection
with FED acquisition 10,486,386 10,486 92,354,461 - - 92,364,947
Cancellation of existing shareholders
common stock (9,356,018)) (9,356) 9,356 - - -
Issuance of common stock related to
exercise of warrant 1,080 1 1,835 - - 1,836
Issuance of common stock for services 316,748 317 2,216,919 - - 2,217,236
Deferred compensation - - - (13,023,364) - (13,023,364)
Amortization of deferred compensation - - - 2,539,828 - 2,539,828
Reversal of deferred compensation
balance for forfeited stock options - - (1,217,139) 1,217,139 - -
Net Loss - - - - (48,166,817) (48,166,817)
-------------------------------------------------------------------------------------
Balance, December 31, 2000 25,069,143 $25,069 $116,622,811 $(9,266,397) $(48,197,817) $59,183,666
========== ======= ============ ============ ============= ===========
The accompanying notes are an integral part of these consolidated statements.
52
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from
inception (January 23, 1996) to December 31, 2000
Period from
Inception
(January 23,
1996) to
December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ........................ $(48,166,817) $ (18,452) $ (3,477) $(48,197,817)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization ... 21,488,686 $ 94 587 21,489,521
Loss on sale of assets .......... 98,548 2,103 -- 97,713
Non-cash charge for stock based
compensation ................ 2,539,828 -- -- 2,539,828
Acquired in-process research and
development ................. 12,820,000 -- -- 12,820,000
Changes in operating assets and
liabilities:
Contract receivables ............ (693,770) -- -- (693,770)
Costs and estimated profits in
excess of billings on
contracts in progress ....... (7,783) -- -- (7,783)
Prepaid expenses and other
current assets .............. (359,506) -- -- (359,506)
Deposits and other assets ....... (94,943) -- -- (94,943)
Advanced payment on contracts to
be completed ................ 311,812 -- -- 311,812
Current portion long term debt .. -- -- -- --
A/P, accrued expenses and other
current liabilities ......... 51,039 -- -- 51,039
------------ ------------ ------------ ------------
Net cash used in operating
activities .................. (12,012,906) (16,255) (2,890) (12,043,906)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment .......... (803,033) -- -- (803,033)
Net cash acquired in acquistion . 1,239,162 -- -- 1,239,162
------------ ------------ ------------ ------------
Net cash provided by investing
activities .................. 436,129 -- -- 436,129
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements.
53
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from
inception (January 23, 1996) to December 31, 2000
Period from
Inception
(January 23,
1996) to
December
2000 1999 1998 31, 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sales of common
stock, net of issuance costs 21,250,000 -- -- 21,281,000
Re-payments of bridge loan and
obligations under capital
lease ....................... (2,305,966) -- -- (2,305,966)
------------ ------------ ------------ ------------
Net cash provided by financing
activities .................. 18,944,034 -- -- 18,975,034
------------ ------------ ------------ ------------
Net increase/(decrease) in cash
and cash equivalents ........ 7,367,257 (16,255) (2,890) 7,367,257
CASH AND CASH EQUIVALENTS,
beginning of period ......... -- 16,255 19,145 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period ...................... $ 7,367,257 $ -- $ 16,255 $ 7,367,257
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ................... $ 244,208 $ -- $ -- $ --
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of business:
Total purchase price ............ $ 98,465,622 $ -- $ --
Fair value of assets, net of cash
acquired .................... 38,807,454 --
Net liabilities assumed ......... 3,816,747 -- --
Excess purchase price over net
assets acquired ............. 54,602,259 -- --
------------ ------------ ------------
Net cash acquired in acquisition $ 1,239,162 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
54
eMAGIN CORPORATION (Formerly Fashion Dynamics Corp.)
Notes to the Consolidated Financial Statements
Note 1 - NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS
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
Corporation (the Merger). FED was a developer and manufacturer of optical
systems and micro displays for use in the electronics industry. FED's wholly
owned subsidiary, Virtual Vision, develops and markets micro display systems and
optics technology for commercial, industrial and military applications. The
merged company changed its name to eMagin Corporation (the Company or eMagin)
(Note 2). 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.
Since its inception, FED Corporation 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 $36.6 million, including $32.6
million by FED prior to the Merger, through cost sharing and contract revenues.
Certain of these arrangements continue through 2001 and may provide for
approximately $9.3 million of additional funding. Such funding is subject to,
among other factors, satisfactory progress on projects and available government
funding.
Through December 31, 2000, the Company had incurred development stage losses
totaling approximately $48.2 million. Prior to the acquisition of FED by FDC,
FED incurred developmental stage losses totaling approximately $52.5 million. At
December 31, 2000, the Company had approximately $8.2 million of cash, cash
equivalents and contract receivables to fund short-term working capital
requirements. At February 28, 2001, such amounts totaled approximately $4.6
million. The Company's ability to continue as a going concern and its future
success is dependent upon its ability to raise capital in the near future to
continue: (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 it will be able to secure financing in the near term
and that the proceeds from such financings, along with its remaining cash
resources at December 31, 2000, will be sufficient to fund the Company's
operations into the first quarter of 2002 and beyond. However, there can be no
assurance that sufficient capital will be available, when required, to permit
the Company to realize its plan, or even if such capital is available, that it
will be at terms favorable to the Company. Additionally, there can be no
assurance that the Company's efforts to produce a commercially viable product
will be successful, or that the Company will generate sufficient revenues to
provide positive cash flows from operations.
55
These and other factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result should the Company be unable to
continue in existence.
Note 2 - FED ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 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), $20.9 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 $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed as follows: $13 million to deferred
compensation for the portion of value of options and warrants exchanged relating
to unvested securities, $18.0 million to identifiable intangible assets as
valued by an independent appraisal, and $54.6 million to goodwill. Such goodwill
is being amortized over a three year period. The Company recorded approximately
$20.9 million in amortization expense related to purchased intangible assets for
the year ended December 31, 2000. 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. Accordingly, the Company recognized a
charge of approximately $12.8 million associated with the write-off of acquired
in-process research and technology, which is included in the accompanying
statements of operations for the year ended December 31, 2000.
The following information reflects pro forma statements of operations data for
the years ended December 31, 2000 and 1999, assuming the acquisition of FED
occurred at the beginning of each year presented:
Year Ended December 31
----------------------
2000 (unaudited) 1999
---- ----
Revenues $3,126,000 $1,895,000
Net loss $(65,305,000) $(32,294,000)
Net loss per share $(2.95) $(1.25)
These pro forma results have been presented for comparative purposes only and do
not purport to be indicative of the results that would have actually resulted
had the acquisition occurred at the beginning of the years presented.
Note 3 - 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 contract,. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
56
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, as periodically adjusted
to reflect revised agreed upon rates.
As of December 31, 2000, the Company had received advance payments on contracts
to be completed of $311,812. Through December 31, 2000, the Company has
recognized revenues of approximately $450,000 under this agreement in the
accompanying consolidated financial statements.
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, 2000 were as follows:
2000
---------------
Total costs incurred and estimated profits $ 3,408,000
Less amounts billed 2,781,000
---------------
Costs and estimated profits in excess of
billings on contracts in progress $ 627,000
===============
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 and two commercial customers. The Company has incurred
research and development costs and earned funding under these agreements as of
December 31, 2000 as follows:
2000
--------------
Unfunded research and development $ 8,053,000
Research and development costs 2,909,000
Funding received (1,328,000)
--------------
$ 9,634,000
==============
The Company may incur approximately $3,396,000 of additional costs on these
efforts. If such costs, as defined, are incurred, the government is obligated to
reimburse the Company $1,439,000 of such amounts.
57
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 non-owner 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 income must
be reported on the face of the 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,
2000, 1999 and 1998. Accordingly, the Company's comprehensive income is the same
as its net income or loss for all periods 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 and Other Intangible Assets
Identifiable intangible assets resulting from the acquisition of FED and the
excess purchase price over net assets acquired ("goodwill") are being amortized
on a straight-line basis over their respective estimated useful lives of
approximately three years. As of December 31, 2000, goodwill and other
intangible assets were comprised of the following (in millions):
Goodwill $54.6
Purchased identifiable intangibles 18.0
Less: Accumulated amortization 20.9
-----
Goodwill and other intangible assets, net $51.7
=====
The Company recorded approximately $20.9 million in amortization expense related
to purchased intangible assets for the year ended December 31, 2000.
58
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.
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, 2000 and 1999, the
Company has net deferred tax assets of approximately $19.8 million and $14.3
million respectively, primarily resulting from the future tax benefit of net
operating loss carry forwards discussed below. Such net deferred tax assets are
fully offset by valuation allowances because of the uncertainty as to their
future to be realized.
At December 31, 2000, the Company has net operating loss carry forwards totaling
approximately $49.7 million, inclusive of the net operating losses acquired as a
result of the acquisition of FED, which expire through 2020, available to offset
future federal taxable income. Pursuant to Section 382 of the Internal Revenue
Code, the usage of a portion of these net operating loss carry forwards is
limited due to changes in ownership that have occurred.
Principles of Consolidation
The accompanying consolidated financial statements of eMagin Corporation include
the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which the Company exercises control. Inter-company
transactions and balances are eliminated.
Loss per Common Share
In accordance with SFAS No 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") were computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares have been excluded from the computation of diluted EPS as their effect is
antidilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("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.
59
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 to the current year
presentation.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No.138 "Accounting for Certain Derivative Instrument and Certain Hedging
Activities," which amends the accounting and reporting standards of SFAS No.
133, "Accounting for Derivatives and Hedging Activities." The Statement
establishes accounting and reporting standards for derivative instruments
(including certain derivative instruments embedded in other contracts) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning
after June 15, 2000 (as amended by SFAS No. 137) and will not require
retroactive restatement of prior-period financial statements. Management
believes the adoption of SFAS 133 will not have a material impact on the
Company.
In March 2000, the FASB issued interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation-An Interpretation of APB
Opinion No. 25." Among other things, FIN 44 clarifies the definition of
employees, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain of its conclusions cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
adopted the provisions of FIN 44 as of July 1, 2000.
Note 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2000 and 1999:
Useful
Lives 2000 1999
--------------- -------------- -------------
Computer equipment and software 3 $ 230,000 $ --
Lab and factory equipment 3 1,230,000 --
Furniture, fixtures and office equipment 10 108,000 --
Leasehold improvements Life of lease 256,000 --
-------------- -------------
1,824,000 --
-------------- -------------
Less- Accumulated depreciation and amortization 556,000 --
-------------- -------------
$ 1,268,000 $ --
============== =============
Depreciation and amortization expense of equipment and leasehold improvements
for the period December 31, 2000 was approximately $580,000. For the year ended
December 31, 1999 these amounts were not material.
60
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
$403,000 at December 31, 2000.
Note 5 - BRIDGE LOANS
In September 1999, FED entered into two $1,000,000 convertible bridge loans for
an aggregate of $2,000,000. Each loan bore interest at 8% and matured in June
2000. The loans were convertible at the option of the holder into shares of the
Company's common stock at a purchase price equal to the per share value of the
private placement completed in connection with the Merger. These liabilities
were assumed by the Company in the Merger. The entire outstanding balance of the
bridge loans, including accrued and unpaid interest was repaid in June 2000.
Note 6 - LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 2000 and 1999:
2000 1999
-------------- --------------
Notes payable (a) $ 346,000 $ --
Capital leases (b) 40,000 --
Other long term debt 50,000 --
-------------- --------------
436,000
Less- Current portion 313,000 --
-------------- --------------
$ 123,000 $ --
============== ==============
a. In May 1999, FED entered into a $625,000 three-year loan
agreement collateralized by its fixed assets. Such liability
was assumed in the Merger. The remaining principal balance is
$221,870 at December 31, 2000 with payments due through 2002
at an interest rate of 13.88%.
In June 1999, FED entered into a $155,000 five-year
uncollateralized loan agreement. Such liability was assumed in
the Merger. The proceeds were used to finance a leasehold
improvement. The principal balance is $124,067 at December 31,
2000 with payments due through 2004 at an interest rate of
18%.
b. The Company is party to a capital lease for certain equipment
with aggregate remaining principal balance totaling $40,121 at
December 31, 2000, excluding interest, due through 2003 at an
interest rate of 7.27%.
Maturity of debt for years ending December 31 are as follows:
2001 $ 313,000
2002 48,000
2003 49,000
2004 26,000
------------
$ 436,000
===========
61
Note 7 - SHAREHOLDERS' EQUITY
The authorized common stock of the Company consists of 40,000,000 shares with a
par value of $0.001 per share.
On March 30, 1998 the Company forward split its common stock 6:1 increasing the
number of issued and outstanding common shares from 1,100,000 to 6,600,000.
On December 31, 1999 the Company forward split its common stock 3.054:1,
increasing the number of issued and outstanding common stock from 6,600,000 to
20,156,400.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million were raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED shareholders, and issued approximately 3.9 million options
and warrants in exchange for existing FED options and warrants. The total
purchase price of the transaction was approximately $98.5 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), $20.9 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 $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed as follows: $13 million to deferred
compensation for the portion of value of options and warrants exchanged relating
to unvested securities, $18.0 million to identifiable intangible assets as
valued by an independent appraisal, and $54.6 million to goodwill. Such goodwill
is being amortized over a three year period. The Company recorded approximately
$20.9 million in amortization expense related to purchased intangible assets for
the year ended December 31, 2000. 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. Accordingly, the Company recognized a
charge of approximately $12.8 million associated with the write-off of acquired
in-process research and technology, which is included in the accompanying
statements of operations for the year ended December 31, 2000.
Note 8 - STOCK-BASED COMPENSATION PLANS
Stock Option Plan
In 1994, FED established the 1994 Stock Plan (the "1994 Plan"), which has been
assumed by the Company. The plan provided for the granting of options to
purchase an aggregate of 1,286,000 shares of the Common Stock to employees and
consultants of FED Corporation.
In 2000, FED established the 2000 Stock Option Plan (the "2000 Plan"), which has
been assumed by the Company. An aggregate 3,900,000 shares of the Company's
common stock are reserved for issuance under the 2000 Plan. The Plan permits the
granting of options and stock purchase rights to employees and consultants of
the Company. The 2000 Plan allows for the grant of incentive stock options
meeting
62
the requirements of Section 422 of the Internal Revenue Code of 1986 (the
"Code") or non-statutory stock options which are not intended to meet the
requirements Section 422 of the Code.
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 year ended
December 31, 2000 is summarized as follows:
Weighted
Average
Shares Exercise Price
------------ --------------
Outstanding at December 31, 1999 -- $ --
Options assumed 3,342,832 2.01
Options granted, post-merger 329,200 9.30
Options exercised - -
Options canceled (281,842) 1.77
------------
Outstanding at December 31, 2000 3,390,190 2.72
===========
Exercisable at December 31, 2000 1,311,093 $2.36
===========
Weighted average fair value of options
granted $ 2.72
At December 31, 2000, there were 1,257,296 shares available for grant under the
2000 Plan.
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: risk-free interest rate of 4.48%; no expected dividend yield,
expected lives of 1.6 years from date of vesting; and expected stock price
volatility of .75. Exercise prices for outstanding options at December 31, 2000
range from $1.72 - $19.50.
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------------
Weighted
Number Weighted Average Average Number
Range of Exercise Outstanding at Remaining Exercise Exercisable at Weighted Average
Prices December 31, 2000 Contractual Life Price December 31, 2000 Exercisable Price
----------------- ----------------- ---------------- ---------- ----------------- -----------------
$ 1.72 - $1.72 2,962,496 7.4 years $ 1.72 1,218,362 $ 1.72
5.25 - 10.50 361,530 8.87 years 9.09 49,115 9.50
11.06- 19.50 66,164 4.3 years 12.52 43,616 12.25
-------------- --------------
3,390,190 1,311,093
============== ==============
63
The Company has elected to continue to account for stock-based compensation
under APB Opinion No. 25, under which no compensation expense has been
recognized for stock options granted to employees at fair market value. Had
compensation expense for stock options granted under the 2000 Plan and 1994 Plan
been determined based on fair value at the grant dates, the Company's net loss
and net loss per share for 2000 would have been increased to the pro forma
amounts shown below.
Net loss: 2000
--------------
As reported .................. $ (48,167,000)
Pro forma..................... $ (49,470,000)
Net loss per share:
As reported .................. $ (2.18)
Pro forma per share........... $ (2.23)
For the years ended December 31, 1999 and 1998, pro forma net loss and net loss
per share would have been the same as net loss and net loss per share.
Warrants
At December 31, 2000, warrants to purchase 800,260 shares of common stock are
issued and outstanding at exercise prices ranging from $1.72 to $26.25.
Note 9 - COMMITMENTS AND CONTINGENCIES
Royalty Payments
The Company is obligated to make minimum annual royalty payments to a
corporation commencing January 1, 2001. Under this agreement, the Company must
pay to the corporation the greater of a minimum royalty per year, or a certain
percentage of net sales of certain products, which percentages are defined in
the agreement with the corporation. The percentages are on a sliding scale
depending on the amount of sales generated. Any minimum royalties paid may be
credited against the amounts due based on the percentage of sales.
License and Technology Agreement
In March 1997, FED entered into a technology agreement with a corporation to
permit potential commercialization of small-format OLED displays. This agreement
was transferred to the Company in the Merger. The Company is dependent upon its
license agreement with the corporation for the development and commercialization
of its currently planned OLED products. Payments were made under evaluation and
license agreements based on the achievement of certain milestones in phases of
the agreements. No payments were required or made for the year ended December
31, 2000. Based on a remaining optional phase of the current agreement the
Company may elect to make additional payments in 2001, if the optional
phase of the agreement is pursued.
64
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:
2001 $4,198,000
2002 2,585,000
2003 1,891,000
2004 383,000
----------
$9,057,000
==========
For the year ended December 31, 2000, rent expense was approximately $2,251,000.
Litigation
The Company may, from time to time, be a party to litigation arising during the
normal course of business. The Company is currently not a party to any
litigation.
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of FED Corporation:
We have audited the accompanying consolidated balance sheet of FED Corporation
(a Delaware corporation in the development stage; see Note 1) and subsidiary as
of December 31, 1999 and the related consolidated statements of operations and
cash flows for the years ended December 31, 1999 and 1998 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 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 the results of their operations and their cash flows
for the years ended December 31, 1999 and 1998 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 Arthur Andersen LLP
February 14, 2000 (except for Note 3,
as to which the date is March 15, 2000)
66
FED CORPORATION (PREDECESSOR)
(a development stage company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS 1999
- ---------------------------------------------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 718,468
Contract receivables 73,304
Costs and estimated profits in excess of
billings on contracts in progress 221,723
Prepaid expenses and other current assets 127,658
----------------
Total current assets 1,141,153
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,214,680
GOODWILL, net 2,671,390
DEPOSITS AND OTHER ASSETS 10,451
----------------
Total assets $ 5,037,674
================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES:
Accounts payable, deferred revenue, accrued
expenses, and other current liabilities $ 2,041,100
Short-term debt 2,126,700
Current portion of long-term debt 268,675
---------------
Total current liabilities 4,436,475
---------------
LONG-TERM DEBT 541,578
---------------
COMMITMENTS (Note 10)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, 0 shares issued and outstanding --
Common stock, $.01 par value, 50,000,000 shares authorized,
4,380,589 shares issued and outstanding 43,806
Additional paid-in capital 47,254,459
Deficit accumulated during the development stage (47,238,644)
---------------
Total shareholders' equity 59,621
---------------
Total liabilities and shareholders' equity $ 5,037,674
===============
The accompanying notes are an integral part of this consolidated balance sheet.
67
FED CORPORATION (PREDECESSOR)
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 15, 2000, THE YEARS ENDED
DECEMBER 31, 1999 AND 1998, AND THE PERIOD FROM INCEPTION (JANUARY 6, 1992)
TO DECEMBER 31, 1999
Period
from Period From
January 1, Inception
2000 to (January 6,
March 15, Year Ended December 31, 1992) to
2000 ---------------------------- December 31,
(unaudited) 1999 1998 1999
------------ ------------ ------------ ------------
CONTRACT REVENUES .................... $ 568,484 $ 1,895,426 $ 6,154,123 $ 14,565,353
------------ ------------ ------------ ------------
Total revenues ......... 568,484 1,895,426 6,154,123 14,565,353
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development, net of
funding under cost sharing
arrangements of $175,000,
$1,148,166, $1,263,448 and
respectively .................. 2,180,519 10,171,387 10,250,010 36,323,800
General and administrative ....... 995,750 5,203,201 3,513,662 15,069,058
Non-cash stock based compensation 7,778,850 -- -- --
Non-cash charge for induced
conversion of debt ............ -- 1,917,391 -- 1,917,391
------------ ------------ ------------ ------------
Total costs and expenses, net 10,955,119 17,291,979 13,763,672 53,310,249
------------ ------------ ------------ ------------
OTHER (EXPENSE): .................... (2,968,414) (403,692) (121,878) (403,102)
------------ ------------ ------------ ------------
Net loss ............... $(13,355,049) $(15,800,245) $ (7,731,427) $(39,147,998)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
68
======
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 - - - - - - - - - -
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
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
69
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
-------- ------- ------- ------- ----------- -------- --------- ------- -------- -------
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
-------- ------- ------- ------- ----------- --------
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
Accumulated
Additional During the
Paid-in Development Subscription
Capital Stage Receivables Total
----------- ------------ ----------- -----------
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
70
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 - - - - - - - - - -
Series F Series G
Preferred Stock Preferred Stock Common Stock
------------------ ------------------ ----------------------
Shares Amount Shares Amount Shares Amount
-------- ------- ------- ------- ----------- --------
ables
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 - -
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
71
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
-------- ------- ------- ------- ----------- -------- --------- ------- -------- -------
Dividend on
Series A
preferred
stock - - - - - - - - - -
Induced
conversion
of preferred
stock and
debt 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
features
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
-------- -------- -------- -------- ----------- ---------
Dividend on
Series A
preferred
stock - - - - - -
Induced
conversion
of preferred
stock and
debt to
common stock (1,922,771) (19,228) (681,446) (6,814) 25,197,312 251,973
Sale of
common stock
to employees
and ESPP - - - - 8,326 83
Common stock
options and
warrants
issued to
nonemployees - - - - - -
Beneficial
conversion
features
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
----------- ------------ ------------ -----------
Dividend on
Series A
preferred
stock - (9,000) - (9,000)
Induced
conversion
of preferred
stock and
debt 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
features
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.
72
FED CORPORATION (PREDECESSOR)
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 15, 2000, THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992)
TO DECEMBER 31, 1999
Period from Period From
January 1, Inception
2000 to (January 6,
March 15, Year Ended December 31, 1992) to
2000 ----------------------------- December 31,
(unaudited) 1999 1998 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,355,049) $(15,800,245) $ (7,731,427) $(39,147,998)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 325,095 1,625,081 1,652,715 4,804,920
Deferred rent -- -- (167,446) --
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
Noncash charge for stock based
compensation 7,778,850 -- -- --
Amortization of debt discount 2,940,339 -- -- --
Changes in operating assets
and liabilities:
Contract receivables (58,659) 188,755 1,723,189 (73,304)
Costs and estimated profits in excess
of billings on contracts in
progress (397,841) 3,069,008 (3,220,079) (221,723)
Prepaid expenses and other current
assets (178,058) 129,840 214,738 140,779
Deposits and other assets -- 23,871 628,756 23,871
Accounts payable, accrued expenses,
and other current liabilities 488,516 131,112 333,264 2,110,597
Advance payments on contracts to be
completed -- (246,518) 246,518 --
------------ ------------ ------------ ------------
Net cash used in operating activities (2,456,807) (8,601,205) (6,319,772) (30,154,492)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (57,574) (250,193) (688,042) (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 (57,574) (250,193) (1,235,545) (3,472,593)
------------ ------------ ------------ ------------
73
Period from Period From
January 1, Inception
2000 to (January 6,
March 15, Year Ended December 31, 1992) to
2000 ----------------------------- December 31,
(unaudited) 1999 1998 1999
------------ ------------ ------------ ------------
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 1,269,378 15,608 40,208 3,419,160
Proceeds from sales of preferred
stock, net of issuance costs -- 3,752,407 6,875,028 23,856,998
Proceeds from short-term debt 1,923,300 -- -- --
Payments of obligations under capital
lease (92,748) -- -- (823,128)
------------ ------------ ------------ ------------
Net cash provided by financing
activities 3,099,930 7,691,580 6,915,236 34,345,553
------------ ------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents 585,549 (1,159,818) (640,081) 718,468
CASH AND CASH EQUIVALENTS, beginning
of period 718,468 1,878,286 2,518,367 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period $ 1,304,017 $ 718,468 $ 1,878,286 $ 718,468
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 11,918 $ 242,000 $ 200,000 $ 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 --
Net book value 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.
74
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. Through December 31, 1999,
such arrangements have provided total funding of approximately $32.6 million
through cost sharing arrangements and contract revenues.
Through December 31, 1999, the Company had incurred development stage losses
totaling approximately $39 million, and at December 31, 1999, had a working
capital deficit of $3.3 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.
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.
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.
75
The components of costs and estimated profits in excess of billings on contracts
in progress as of December 31, 1999 were as follows:
1999
-------------
Total costs incurred and estimated profits $ 1,216,000
Less amounts billed 994,000
-------------
Costs and estimated profits in excess of
billings on contracts in progress -------------
$ 222,000
=============
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
----------- -----------
Unfunded research and development $ 8,997,000 $ 8,726,000
Research and development costs 2,322,000 2,787,000
Funding received (1,148,000) (1,263,000)
----------- -----------
$10,171,000 $10,250,000
=========== ===========
Although it is not under any obligation, the Company may incur approximately
$6,700,000 of additional costs on these efforts. If such costs, as defined, are
incurred, the government is obligated to reimburse the Company for $3,326,000 of
such costs.
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 non-owner changes
in equity (or other comprehensive income) such as unrealized gains or losses on
securities classified as available-for-sale,
76
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 and 1998.
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.
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 to be realized.
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, 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
77
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.
3. ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the merger, FDC issued approximately 10.5 million shares of its common
stock to FED shareholders and issued approximately 3.9 million options and
warrants in exchange for existing FED options and warrants. The total purchase
price of the transaction was approximately $98.5 million, including $73.4
million of value relating to the shares issued (at a fair value of $7 per share,
the value of a simultaneous private placement transaction of similar
securities), $20.9 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 $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
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
78
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:
Useful
Lives 1999
-------------- --------------
Computer equipment and software 3 $ 558,000
Lab and factory equipment 3 3,142,000
Furniture, fixtures and office equipment 10 149,000
Leasehold improvements Life of lease 669,000
--------------
4,518,000
Less- Accumulated depreciation and amortization (3,304,000)
--------------
$ 1,214,000
==============
Depreciation and amortization expense of equipment and leasehold improvements
for the years ended December 31, 1999 and 1998 amounted to approximately
$810,000 and $1,026,000 respectively.
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 for the year ended December 31, 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 note-holders 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 exercise price
79
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 392,157 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 converted 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.
7. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1999:
1999
--------------
Notes payable (a) $ 653,000
Liabilities assumed from Virtual Vision (b) 100,000
Capital leases (c) 57,000
--------------
810,000
Less-Current portion 269,000
--------------
$ 541,000
==============
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 of Virtual Vision, 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 $56,868 at
December 31, 1999, excluding interest, due through 2003 at an
interest rate of 7.27%
80
Maturity of debt as of December 31, 1999 is as follows:
2000 $ 269,000
2001 351,000
2002 115,000
2003 49,000
2004 26,000
----------
$ 810,000
==========
8. SHAREHOLDERS' EQUITY
In March 2000, FED repriced approximately 325,000 common stock options issued to
employees. The repricing resulted in a non-cash compensation expense of
approximately $2.7 million for the period ended March 15, 2000.
In addition, FED repriced approximately 108,000 warrants issued to outside
consultants and organizations that provided bridge loans and funding commitments
to the Company. The repricing resulted in a non-cash charge of approximately
$1.2 million, which is included in the accompanying consolidated statement of
operations for the Company period ended March 15, 2000.
In March 2000, FED issued options to purchase common stock to employees at an
exercise price below the fair market value on the date of grant of $7.00. These
options vest over a period of 1 - 60 months with a minimum lockup period of 18
months. As a result, the Company recorded deferred compensation expense in the
amount of approximately $12.5 million, which will be amortized over the vesting
period of the options.
FED also issued warrants to shareholders at an exercise price below the fair
market value on the date of grant. As a result, FED recorded a one-time
compensation expense of approximately $2.5 million for the period ended March
15, 2000.
The recipients of the repriced options and warrants were required to execute
lock-up agreements that prohibit disposition of the underlying shares for a
period of 18 months following the Merger. Thereafter the recipients may transfer
no more that 20% of the underlying shares in the 6 months following the end of
the 18-month period, and the balance of the underlying shares may be transferred
24-27 months after the Merger.
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.
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.
81
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
--------------- ---------------
Net loss as reported $ (15,800,000) $ (7,731,000)
Net loss pro forma (16,656,000) (7,949,000)
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.
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
82
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 and 1998 is summarized as follows (all amounts have been
restated to reflect the Company's 1 for 7 reverse stock split (Note 8)):
1999 1998
-------------------------------- --------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
----------- ---------------- ------------ ----------------
Outstanding at beginning of year 288,875 $ 18.13 269,642 $ 16.73
Options granted 155,666 21.00 24,728 34.44
Options exercised - - (714) 17.50
Options forfeited (22,718) 22.43 (1,163) 18.48
Options canceled (46,521) 21.68 (3,618) 27.23
----------- ------------
Outstanding at end of year 375,302 18.59 288,875 18.13
=========== ============
Exercisable at end of year 283,389 134,198 16.38
=========== ============
Weighted average fair value of
options granted $ 14.84 $ 8.68
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.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------------
Weighted
Number Weighted Average Average Number
Range of Exercise Outstanding at Remaining Exercise Exercisable at Weighted Average
Prices December 31, 1999 Contractual Life Price December 31, 1999 Exercisable Price
----------------- ----------------- ---------------- ---------- ----------------- -----------------
$ 5.25 - $15.00 120,302 5 years $ 11.23 124,971 $ 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
----------- -----------
375,302 288,875
=========== ===========
83
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 were purchased by
employees during 1999. 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. 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 of royalty expense in
research and development expenses for the year ended December 31, 1998.
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
84
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 $ 2,879,000
2001 2,306,000
2002 1,046,000
2003 915,000
2004 383,000
------------
$ 7,529,000
============
For the year ended December 31, 1999, rent expense was approximately $2,813,000.
85
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the 2001 Proxy Statement under the heading
"Information Regarding Directors and Executive Officers" is incorporated herein
by reference in response to this item.
ITEM 11: EXECUTIVE COMPENSATION.
The information contained in the 2001 Proxy Statement under the heading
"Compensation and Other Transactions with Directors and Executive Officers" is
incorporated herein by reference in response to this item.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the 2001 Proxy Statement under the heading
"Principal Stockholders" and "Stock Ownership of Directors and Management" is
incorporated herein by reference in response to this item.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the 2001 Proxy Statement under the heading
"Compensation and Other Transactions with Directors and Executive Officers" is
incorporated herein by reference in response to this item.
86
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Financial Statements are included in Item 8, "Financial Statements and
Supplementary Data" as follows:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 2000 and 1999
- Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999 and 1998 and for the period from
inception (January 23, 1996) to December 31, 2000
- Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2000, 1999, 1998 and 1997 and the period from
inception (January 23, 1996) to December 31, 2000.
- Consolidated Statements of Cash Flows--Years ended December 31,
2000, 1999 and 1998 and for the period from inception
(January 23, 1996) to December 31, 2000
- Notes to Consolidated Financial Statements--December 31, 2000
(a) 2. Financial Statement Schedules
None
(a) 3. Exhibit List
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Fashion Dynamics Corp.,
FED Capital Acquisition Corporation and FED Corporation dated
March 13, 2000, as filed in the Registrant's Form 8-K/A Report
(file no. 001-15751) incorporated herein by reference.
3.1 Articles of Incorporation filed January 23, 1996, as filed in
the Registrant's Form 10-SB (file no. 000-24757) incorporated
herein by reference.
87
3.2 Bylaws, as filed in the Registrant's Form 10-SB (file no.
000-24757) incorporated herein by reference.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of
the holders of common stock of the Registrant.
10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8
(file no. 333-32474) incorporated herein by reference.
10.2 Consulting Agreement between eMagin Corporation and Verus
International Ltd., dated March 16, 2000.
10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000.
10.4 Employment Agreement with Susan K. Jones, dated March
16, 2000.
10.5 Employment Agreement with Andrew Savadelis, dated September
11, 2000.
10.6 Nonexclusive Field of Use License Agreement relating to OLED
Technology for miniature, high resolution displays between the
Eastman Kodak Company and FED Corporation dated March 29,1999.
(Confidential treatment requested for portions of this
agreement).
10.7 Amendment Number 1 to the Nonexclusive Field of Use License
Agreement relating to OLED Technology for miniature, high
resolution displays between the Eastman Kodak Company and FED
Corporation dated March 16, 2000.
10.8 Amendment Number 1 to the Lease between International Business
Machines Corporation and FED Corporation dated July 9, 1999.
10.9 Lease between International Business Machines Corporation and
FED Corporation dated May 28, 1999.
10.11 Amendment Number 2 to the Lease between International Business
Machines Corporation and FED Corporation dated January 29,
2001.
10.12 Virtual Vision lease between Redson Building Partnership and
Vision Newco dated December 15, 1995.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March 2001.
EMAGIN CORPORATION
BY: /s/ Gary Jones
-----------------------------------------
Gary Jones
CHIEF EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
NAME TITLE DATE
- --------------------------- --------------------------- ---------------
/s/ Gary Jones President, Chief Executive Officer and March 30, 2001
- --------------------------- Director (Principal Executive Officer)
Gary Jones
/s/ Andrew P. Savadelis Executive Vice President and Chief March 30, 2001
- --------------------------- Financial Officer (Principal Financial
Andrew P. Savadelis Accounting Officer)
/s/ Claude Charles Director March 30, 2001
- ---------------------------
Claude Charles
/s/ Ajmal Khan Director March 30, 2001
- ---------------------------
Ajmal Khan
89
/s/ N. Damodar Reddy Director March 30, 2001
- ---------------------------
N. Damodar Reddy
/s/ Jack Rivkin Director March 30, 2001
- ---------------------------
Jack Rivkin
/s/ Martin L. Solomon Director March 30, 2001
- ---------------------------
Martin L. Solomon
90