SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-24757
EMAGIN CORPORATION
(Exact name of registrant as specified in its charter
Delaware 56-1764501
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2070 Route 52
Hopewell Junction, NY 12533
(Address of principal executive offices)
Registrant's telephone number, including area code:
(845) 892-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock (par
value $0.001 per
share)
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 and 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 / /
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of Common Stock reported by
The American Stock Market on April 25, 2002, was approximately $24.2 million.
For the purposes of calculation, all executive officers and directors of the
Company and all beneficial owners of more than 10% of the Company's stock (and
their affiliates) were considered affiliates.
As of April 1, 2001, the Registrant had outstanding 30,262,854 shares of
Common Stock.
PRELIMINARY NOTE:
This Amended Annual Report on Form 10-K/A is being filed to report Part III
information (Items 10, 11, 12 and 13) in lieu of the incorporation of such
information by reference to the Company's definitive proxy material for its 2001
Annual Meeting of Shareholders. In all other material respects, this Amended
Annual Report on Form 10-K/A is unchanged from the 2001 Annual Report on Form
10-K previously filed by the Company on April 1, 2002.
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FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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
Except for the historical information contained herein, some of the
statements in this Report contain forward-looking statements that involve risks
and uncertainties. These statements are found in the sections entitled
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Risk Factors." They include statements concerning:
our business strategy; expectations of market and customer response; liquidity
and capital expenditures; future sources of revenues; expansion of our proposed
product line; and trends in industry activity generally. In some cases, you can
identify forward-looking statements by words such as "may," "will," "should,"
"expect," "plan," "could," "anticipate," "intend," "believe," "estimate,"
"predict," "potential," "goal," or "continue" or similar terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. For example, assumptions that could cause
actual results to vary materially from future results include, but are not
limited to: our ability to successfully develop and market our products to
customers; our ability to generate customer demand for our products in our
target markets; the development of our target markets and market opportunities;
our ability to manufacture suitable products at competitive cost; market pricing
for our products and for competing products; the extent of increasing
competition; technological developments in our target markets and the
development of alternate, competing technologies in them; and sales of shares by
existing shareholders. Although we believe that the expectations reflected in
the forward looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Unless we are required
to do so under US federal securities laws or other applicable laws, we do not
intend to update or revise any forward-looking statements.
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PART I
ITEM 1: BUSINESS
Introduction
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. Our first commercial
product, the SVGA+ (Super Video Graphics Array plus 52 added columns of data)
OLED microdisplay was first offered for sampling in 2001, and our first SVGA-3D
(Super Video Graphics Array plus built-in stereovision capability) microdisplay
was first shipped in February 2002. We are now accepting orders for larger
quantities of our first microdisplay product and shipping samples of our second
commercial microdisplay product. These products are being applied or considered
for near-eye and headset applications in products such as entertainment and
gaming headsets, handheld Internet and telecommunication appliances,
viewfinders, and wearable computers to be manufactured by original equipment
manufacturer (OEM) customers.
Our 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. Using our OLED technology,
many computer and video electronic system functions can be built directly into
the OLED-on-silicon microdisplay, resulting in compact systems with expected
lower overall system costs relative to alternate microdisplay technologies. We
license fundamental OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. Stanford Resources-iSuppli, an industry market research
organization, has recently identified the emergence of OLED technology as a
major advance, with OLED revenue expected to rise to more than $1.6 billion in
2007 from $200 million this year.
As the first to exploit OLED technology for microdisplays, and with our partners
and intellectual property, we believe that we enjoy a significant advantage in
the commercialization of this display technology. We are the only company to
announce, publicly show and sell full-color OLED-on-silicon microdisplays.
Industry Overview
The overall flat panel display industry is predicted to grow to over $69
billion in 2005, according to market research by DisplaySearch. Within the flat
panel industry there are various sizes and applications of flat panel displays,
ranging from wall size signage to calculator and viewfinder displays. Displays
are sold as independent products (such as flat TVs) or as components of other
systems (such as laptop computers). Our products target one segment of the flat
panel industry - near-eye microdisplays.
Near-eye microdisplays are used in small optically magnified devices such
as video headsets, camcorders, viewfinders and other portable devices.
Microdisplays are typically of such
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high resolution that they are only practically viewed with magnifying optics.
Although the displays are typically physically smaller than a postage stamp,
they can provide a magnified viewing area similar to that of a full size
computer screen. For example, when magnified through a lens, a high-resolution
0.5-inch to 0.75-inch diagonal display can appear comparable to a 19 to 21-inch
diagonal computer screen at about 2 feet from the viewer or a 60-inch TV screen
at about 6 feet. One version of our optics recreates the viewing and sound
experience of sitting in the middle seat of a typical movie theater.
Stanford Resources-iSuppli, a market intelligence firm focusing on the
global electronic display industry, forecasts that the world market for
microdisplays as components will grow from $669 million in 2001 to $1.9 billion
in 2007, for a compounded annual growth rate of 19%. Another leading industry
market research organization, DisplaySearch, projects that the microdisplay
market is expected to grow to $3.1 billion by 2005.
We believe that the most significant driver of the microdisplay market is
growing consumer demand for mobile access to larger volumes of information and
entertainment in smaller packages. This desire for mobility has resulted in the
development of microdisplay products in two categories: (i) near-eye
microdisplays incorporated in products such as viewfinders, digital cameras,
video cameras and personal viewers for cell phones and (ii) headset-application
platforms which include mobile devices such as notebook and sub-notebook
computers, wearable computers, portable DVD systems, games and other
entertainment.
Until now, microdisplay technologies have not simultaneously met all of the
requirements for high resolution, full color, low power consumption, brightness,
lifetime, size and cost which are required for successful commercialization in
OEM consumer products. We believe that our new OLED-on-silicon microdisplay
product line meets these requirements better than alternate products and will
help to enable virtual imaging to emerge as an important display industry
segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
Our microdisplays are based upon organic light emitting diode (OLED)-on-silicon
technology. Our OLED-on-silicon technology uniquely permits millions of
individual low-voltage light sources to be built on low-cost, silicon computer
chips to produce single color, white, or full-color display arrays.
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. Using our OLED technology, many computer
and video electronic system functions can be built directly into the silicon
chip, under the OLED film, resulting in very compact, integrated systems with
lowered overall system costs relative to alternate technologies.
We have developed our own proprietary technology to create high performance
OLED-on-silicon microdisplays and related optical systems and we license
fundamental OLED technology from Eastman Kodak. (See "Intellectual Property" and
"Strategic Relationships") We expect that the integration of our OLED-on-silicon
microdisplays into mobile electronic products
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will result in lower overall system costs to our original equipment manufacturer
(OEM) customers.
We believe that 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 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:
o the user does not need to as accurately position the head-wearable
display to the eye;
o the image will change minimally with eye movement and appear more
natural; and
o the display can be placed further from the eye.
In addition, our OLED-on-silicon microdisplays offer faster response times
and use less power than competitive liquid crystal microdisplay systems. We
expect that our integrated electronics and unique OLED characteristics, coupled
with our lenses, will result in lower overall system costs for OEMs.
Our OLED microdisplay stores, until refreshed, all the color and luminance
value information at each of the more than 1.5 million picture elements (pixels)
in the display array, eliminating the flicker or color breakup seen by most
other high-resolution microdisplay technologies. Power consumption at the system
level is expected to be the lowest of any full-color, full-video SVGA resolution
range, large view microdisplay on the market. The OLED's ability to emit light
at wide angles allows customers to create large field of view (approx. 40
degrees), wide image capture range images from very compact, low-cost, one-piece
optical systems. The display contains the majority of the electronics required
for connection to the RGB (red, green, blue signal) port of a portable computer
imbedded in its silicon chip backplane, thereby eliminating many other
components required by other display technologies such as D-A converters,
application-specific integrated circuits (ASICs), light sources, multiple
optical elements, and other components. We believe that these features enable
our new class of microdisplay to potentially be the most compact, highest image
quality, and lowest cost solution for high resolution near-eye applications,
once in full production.
We have completed the development of our first two customer-oriented
products, our SVGA+ resolution microdisplay (1.53 million picture elements) and
our stereovision-capable SVGA-3D microdisplay (1.44 million picture elements).
We are currently far along in developing a military and industrial oriented
ultra-high-luminance SXGA integrated circuit (3.9 million picture elements) that
is due for completion in 2002. 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. We also provide
Developer Kits which include a color SVGA+ resolution microdisplay and
associated electronics required for OEMs to build and test new products. This
developer kit provides OEMs with the first opportunity for evaluation of an
OLED-on-silicon microdisplay.
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Our Products
We offer our products to Original Equipment Manufacturers (OEM) and other
large volume buyers as both separate components and integrated bundles in a
three-tiered platform:
(1) OLED-on-silicon microdisplays for integration into OEM products for
consumer, industrial, and military markets;
(2) MicroviewerTM modules that incorporate our OLED-on-silicon
microdisplays with compact lenses and electronic interfaces for integration
into OEM products for consumer, industrial, and military markets; and
(3) Head-wearable display systems that will incorporate our MicroviewersTM
for consumer and industrial markets.
We also plan to offer engineering support, enabling customers to quickly
integrate our products into their own product development programs.
(1) OLED Microdisplay Products
We serve as a component manufacturer by supplying our OLED-on-silicon
microdisplays for those customers who have their own lenses or integrated
circuits. Our first commercial microdisplay products include:
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, and was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display. The design permits users to run either (1) standard SVGA
(800 x 600 pixels) to interface to the analog output of many portable computers
or (2) 852 x 480, using all the data available from a DVD player in a 16:9 wide
screen entertainment format. The SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable electronics applications. The display also has an internal
NTSC monochrome video decoder for low power night vision systems. This product
is designed to interface with most portable personal computers.
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
priced lower than the SVGA+, so it is likely to be selected whenever the OEM
customer does not need monochrome NTSC or the extra columns of resolution.
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0.98-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 monochrome pixels and will be adaptable to color
VGA resolution. The display will have a capability for very high luminance. We
expect that this display will be able provide over 30,000 Cd/m2 luminance. For
reference, a typical notebook computer operates at 80 Cd/m2 peak luminance. 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.
(2) MicroviewerTM Products Incorporating Lenses
By providing an integrated solution of a complete microdisplay and lens
assembly to integrate into OEM customers' end product design, OEM customers can
avoid incurring expensive optics design and tooling costs. Different lens and
microdisplay specifications can be mixed and matched to be adapted to many end
products.
We have developed advanced lens technology for several applications and
hold key patents on low cost, high performance lens technology for microdisplay
applications. 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 intend to sell MicroviewerTM modules to OEMs for integration with their
branded products, or incorporated into eGlassTM Personal ViewerTM head-wearable
displays to be supplied by our subsidiary, Virtual Vision, Inc. Some of our
potential customers have stated a preference for MicroviewersTM over
microdisplays since MicroviewersTM incorporate lenses which save OEMs a step in
their manufacturing process and can save them the long time required to develop
a high performance lens system.
(3) eGlassTM Personal ViewerTM Head-Wearable Systems
Personal ViewerTM head-wearable systems, such as our eGlassTM Personal
ViewerTM, 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 to 24 inches from the eye using a
0.59-inch diagonal microdisplay (SVGA-3D). 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 through direct sales and our
e-commerce website which is under development.
We believe that our strategy of offering our products both as separate
components and as integrated bundles that include microdisplays and lenses will
allow us to address the needs of the largest number of potential customers.
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Recent Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received first
place for the US Air Force and was recognized as one of the best dual use
technologies in 2001 recognition across all branches of the Armed Services for
the Second Annual Dual Use Science and Technology Achievement Award awarded by
the Deputy Under Secretary for Defense, Charles J. Holland. The award recognizes
the best dual use programs and honors those responsible for developing and
implementing technology beneficial to both military and commercial sectors.
o 2001 Product of the Year
January 17, 2001. eMagin received a 2001 Product-of-the-Year Award from
Electronic Products Magazine, honoring eMagin for the development of its
first-of-class high-resolution active matrix OLED-on-silicon microdisplay, based
on significant advances in technology.
o 2001 U.S. Army Phase II Quality Award
August 21, 2001. eMagin received a 2001 US Army SBIR (Small Business
Innovation Research) Phase II Quality Award for the development of
high-resolution active matrix OLED microdisplays for incorporation into military
head-mounted displays. The annual Quality Awards Program recognizes top quality
Army Phase II projects for their technical achievement, contribution to the Army
and potential for commercial use. Selected by a distinguished panel of Army and
industry experts, eMagin's project was among only five selected to receive a
2001 U.S. Army SBIR Phase II Quality Award through the rigorous Quality Awards
competition.
o Display of the Year 2000 Gold Award
June 6, 2001. eMagin was honored by The Information Display Magazine and
Society Information Display with the Display of the Year Gold Award for its
OLED-on-Silicon microdisplay. The Display of the Year Award was established in
1995 to recognize outstanding products chosen for their innovation and potential
impact on current and future display markets. An international committee of
distinguished display technologists and leading editors in a four-month process
of nominations and voting made the selection.
Our Market Opportunity
The growth potential of our selected target market segments have been
investigated using information gathered from key industry market research firms,
including Display Search, Frost and Sullivan, Fuji-Chimera, International Data
Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was
obtained using published reports and data obtained at industry symposia. We have
also relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
We believe that the consumer oriented, virtual-imaging market is
characterized by about 20 large OEMs that, collectively, dominate 90% of the
market. The non-consumer market consists of niches - industrial, medical,
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military, arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within
each of these market sectors, we believe that 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:
(1) 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 groups of products:
-- Digital cameras and camcorders, which typically use direct view displays
at 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.
-- 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. In order for the high-resolution wireless
telecommunications market to develop, Generation 3 (G3) high speed data
transmission must become widely available.
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.
(2) Head-wearable Display Platforms
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often
referred to as HMDs or headsets. 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. They may contain one (monocular) or
two (binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications.
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
products. The new generation of soldiers will be highly mobile, and will often
need to carry highly computerized communications and surveillance equipment. To
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enable interaction with the digital battlespace, rugged, yet lightweight and
energy efficient technology is required. Currently available microdisplay
technologies do not meet the requirements for low power, hands-free, day and
night-viewable displays. Our OLED microdisplays demonstrate performance
characteristics important to military and other demanding commercial and
industrial applications including high brightness and resolution, wide dimming
range, wider temperature operating ranges, shock and vibration resistance and
insensitivity to high G-forces. The image does not suffer from flicker or color
breakup in vibrating environments, and the microdisplay's wide viewing angle
allows ease of viewing for long periods of time. The OLED's very low power
consumption reduces battery weight and increases allowed mission length.
Properly implemented, we believe that head-mounted systems incorporating our
microdisplays will increase effectiveness by allowing hands-free operation and
increasing situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. The OLED's wide temperature range
is especially of interest for military applications because the display can turn
on instantly at temperatures far below freezing and can operate at very high
temperatures in desert conditions.
Our OLED microdisplays were selected for several aircraft vehicles and
soldier applications, including the US Army Land Warrior program and the US Air
Force Joint Strike Fighter. Land Warrior, a core program in the Army's drive to
digitize the battlefield, is an integrated digital system that incorporates
computerized communication, navigation, targeting and protection systems for use
by the twenty-first century infantry soldier. Kaiser Electro-Optics, a Rockwell
Collins company and the principal contractor for the US Army's Land Warrior HMD
system, and eMagin will apply their respective expertise in HMD and imaging
technology to develop rugged, yet lightweight and energy efficient products
meeting the requirements of tomorrow's soldier. The US Army expects to initially
equip more than 40,000 soldiers with the Land Warrior system. The US Air Force
has selected our OLED microdisplay technology for incorporation into the Strike
Helmet 21 system that uses Integrated Panoramic Night Vision Goggles (IPNVG) in
avionics helmets. The Strike Helmet 21 system is targeted for integration into
F-15E aircraft in the 2003-2004 time period. Similar systems are of interest for
other military applications as well as for related operations such as fire and
rescue.
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: immediate access to inventory (parts, tools and equipment
availability); instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; and real-time viewing of images and data
during microsurgery or endoscopy.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
-- Entertainment and gaming video headset systems, which permit individuals
to view television (including HDTV), video CDs, DVDs and video games on virtual
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large screens or stereovision in private without disturbing others. Even though
entertainment and gaming headsets represent an emerging product class, we are
seeing demand from OEMs. Headset game systems for portable computers with head
tracking and/or stereovision appears to be our predominate high quantity near
term market opportunity, with several customers indicating an interest in large
production quantities of our displays. Our current SVGA-3D display was designed
specifically for this market. We believe that these new headset game systems can
provide a game or telepresence experience not otherwise practical using
conventional direct view display technology. We expect low cost to be important
for success in this field, and expect our product cost to decrease in high
quantity production.
-- Notebook computers, which can use head-wearable devices to reduce power
as well as expand the apparent screen size and increase privacy. Current
notebook computers do not use microdisplays. Our products can apply not only to
new models of 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 plug-in peripherals to be compatible with most notebook computers. We
believe that the SVGA-3D microdisplay is well-suited for most portable PC
headsets. Our microdisplays can be operated using the USB power source of most
portable computers. To our knowledge, it is the only microdisplay that is
capable of doing this without potentially damaging the PC. This eliminates added
power supplies, batteries, and rechargers and reduces system complexity and
cost.
-- Handheld personal computers, whose small, direct view screens are often
limitations, but which are now capable of running software applications that
would benefit from a larger display. Microdisplays can be built into handheld
computers to display more information content on virtual screens without
forfeiting portability or adding the cost a larger direct view screen.
Microdisplays are not currently used in this market. We believe that GPS viewers
and other novel products are likely to develop as our displays become more
available.
-- Highly compact wearable computers and personal digital assistants (PDAs)
using video headsets as screens can be made possible by high-resolution
microdisplays. A lightweight (under one pound) pocketsize computer can
potentially be created with a fold-out keyboard, compact input device, or voice
actuation and a headset that provides a near-desktop personal computer
experience.
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. We
believe that our microdisplays will catalyze the growth of new products and
applications such as lightweight wearable computer systems.
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Selected Applications by Market Sector
------------------------------- ------------------------------------------------
Sector Representative Applications
------------------------------- ------------------------------------------------
Portable Computer Peripheral o Notebook and SuperSubnotebook computer
headsets
o Miniature data viewers
------------------------------- ------------------------------------------------
Entertainment o Games
o Headset Television/DVDs
------------------------------- ------------------------------------------------
------------------------------- ------------------------------------------------
Industrial, Medical, & o Surgery and Dentistry
Administration o Industrial Control and Safety
o Emergency Services
o Inventory and Retail
o Institutional Control
o Maintenance (Industry & Consumer)
o Communications
o Finance
o Education and Training
------------------------------- ------------------------------------------------
Military o Communications
o Targeting and Enhanced Vision
o Handheld & Headmount Equipment
o Body worn displays
o Avionics (Helmet mount)
o Ground and Water Vehicles
o Maintenance & Training
o Special Applications
------------------------------- ------------------------------------------------
Telecommunications, Handheld, o Cell Phones/Headset phones
and Small Instruments o Handheld & Portable Internet Viewers
o Smart Appliances & Instruments
------------------------------- ------------------------------------------------
Advanced Computer o CAD/CAM
Applications o Virtual Reality and Simulations
o Ultra-High Resolution
------------------------------ ------------------------------------------------
Our Strategy
Our strategy is to establish and maintain a leadership position as a
worldwide supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
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 to market.
Develop products for large consumer markets via key relationships with
OEMs. Our relationships with OEMs whose products use microdisplays have allowed
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us to identify initial microdisplay products to be produced for entertainment,
industrial, and military headsets, followed by other applications such as
digital cameras, camcorders and hand-held Internet and telecommunications
appliances.
Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain capital-intensive portions
of microdisplay production, such as chip fabrication, to minimize both our costs
and time to market. We intend to ret ain 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 under tight control we can better 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. By
performing the processes in-house we can continue to directly make improvements
in the processes which will improve device performance. We also retain the
ability to customize certain aspects such as chromaticity (color balance),
specialized boards or interfaces, and adjust other parameters at the customer's
request. In the area of lenses and head-wearable displays, we intend to focus on
design and development, while working with third parties for the manufacture and
distribution of finished products. We intend to prototype new optical systems,
provide customization of optical systems, and manufacture limited volumes at our
subsidiary, Virtual Vision, but intend to outsource high volume manufacturing
operations.
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
develop 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 will also 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
future research and development activities to better meet our customer's
requirements. Moreover, we expect to provide microdisplays and MicroviewersTM to
some of these partners, thereby taking advantage of 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. We license Eastman Kodak's OLED and optics
technology portfolio. We have a nonexclusive, perpetual, 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
15
than 2 inches for all OLED display technology previously developed by Kodak. An
annual minimum royalty is paid 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. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by 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. 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 has developed certain types of molecules for potential use in
different parts of the OLED device structure.
We have a joint research and development agreement with IBM to accelerate
the development of OLED-on-silicon technology. The OLED-on-silicon microdisplays
developed under the agreement have the potential to be incorporated in future
IBM products currently in exploratory or product development stages. This
technology may 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. This technology effort
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 2001 at the Consumer
Electronics Show in Las Vegas and at CeBit in Germany.
We also have a joint OLED materials development effort with Covion Organic
Semiconductors GmbH, a spin-off of Hoechst. We entered into an arrangement with
LG Corporation of Seoul, Korea for the provision by us of certain technologies
for evaluation by LG in return for a payment of $750,000 which was paid in 2000
and 2001. We also completed a convertible debt financing with SK Corporation of
Seoul, Korea on September 18, 2001. We have worked with Honeywell, Kaiser
Electronics (a subsidiary of Rockwell Collins), Raytheon, and others on a
variety of US 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 had industry relationships with LG Electronics, Harris, NASA,
Lawrence Livermore National Laboratories, and the United States Display
Consortium, among others. We intend to continue to establish additional
strategic relationships in the future.
Our Technology Platforms
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
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and can be capable of higher brightness and fuller color than liquid crystal
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 as part of the OLED display, 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 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 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.
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;
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o Long operating life;
o High brightness for improved viewing;
o High-speed performance resulting in clear video images;
o Wide operating temperature range; and
o Good environmental stability (vibration and humidity).
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 minute
amount of OLED material is used in each OLED-on-silicon microdisplay so that
material costs, other than the integrated circuit itself, are small. The number
of displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays (LCDs) because OLEDs do not require a space-wasting perimeter seal
band.
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, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are 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. System cost relative to
liquid crystal and liquid crystal on silicon (LCOS) competitive products is thus
reduced. 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 simplifies optics for 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 LCOS microdisplays. This results in less eye fatigue and makes it
relatively easy to position the imaging systems to the eye.
Low power consumption for improved battery life and longer system life.
OLEDs emit light rather than transmitting it, so no power-consuming backlight or
frontlight, as required for liquid crystal displays, is required. 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 all
pixels all the time. Most optical systems used for our OLEDs are highly
efficient, permitting over 80% of the light to reach the eye, whereas reflective
technologies such as liquid crystal on silicon require multiple
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beam splitters to get light to the display, and then into the optical system.
This results in typically less than 25% light throughput efficiency in
reflective microdisplay systems. Most important, we do not need a power-hungry
video frame buffer, as required in liquid crystal frame-sequential color
systems. Battery life can therefore be long. A stereovision headset display
using our SVGA-3D displays can run off the USB port of a computer and could
operate for over 5 hours using three AAA batteries.
Long operating life. Most of our potential customers require 5,000 to
10,000 hours of operation to half-life. Half-life refers to the time it takes
the operating display to reach half of its initial brightness. We believe our
OLED display technology already exceeds these numbers for most of our consumer
product applications. There does not appear to be a fundamental limit to
significant life increases. Test devices in our research laboratory have
exceeded an extrapolated 100,000 hours to half-life.
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 overlaid onto brightly lit 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 rapidly than liquid crystals or most cathode ray tubes (CRTs). This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. 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.
Flicker-free; no color breakup. 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, even at low refresh rates. A
lower refresh rate not only helps reduce power, it also facilitates system
integration. 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 difficult technological challenge as display
resolutions increase.
Wide operating temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
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non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees C, while our OLEDs turn on instantly and can operate between
-55 degrees C and 130 degrees C. We specify a smaller range on most products to
accommodate low cost packaging. This is an important characteristic for many
portable products that may be used outdoors in many varying environmental
conditions. It is especially important for military customers. Insensitivity to
vibration, shock, and pressure are also important environmental control
attributes.
Complementary Lens and System Technology
We have developed a wide range of technologies which complement our core
OLED and lens technologies and which will enhance our competitive position in
the microdisplay and head-wearable display markets. These include:
Lens 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 include:
-- 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;
-- Allows a compact and lightweight lens system that can greatly magnify a
microdisplay to produce a large field of view;
-- 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;
-- Can be designed to provide focusing to enable users with various
eyesight qualities to view images clearly; and
-- Can optionally 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 people with moderately poor accommodation to use a head-wearable
display as a portable computer-viewing accessory.
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 EyeblockerTM
provides a sharp image without requiring most users to squint. The Eyeblocker
can also be moved to create an effective see-through appearance. To our
knowledge, we have made the lightest weight, high-resolution head-wearable
display with an over 35(Degree) diagonal field of view ever publicly
demonstrated.
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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 wireless high quality
video from 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. Commercialization of this technology will be
considered in 2003.
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 We publicly demonstrated the world's first
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 We publicly demonstrated the world's first
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 We publicly demonstrated 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 We publicly demonstrated the world's first
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 publicly 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.
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January 2001 We publicly 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.
May 2001 We publicly demonstrated our first commercial
product display, a 852 x 600 (SVGA+) full color
microdisplay with 15 (mu)m pixels at the Society
for Information Display International Symposium.
This coincided with initiation of sample
deliveries.
October 2001 We publicly demonstrated the world's first
microdisplay with built-in stereovision capability
(SVGA-3D) in a binocular 3D headset in Yokohama,
Japan.
February 2002 We made initial commercial shipments of our
SVGA-3D microdisplay.
Sales and Marketing
Current Status:
We are shipping initial quantities of our first two commercial microdisplay
products. Our SVGA+ resolution OLED microdisplay (1.53 million picture elements)
was specifically designed to meet the needs of several military, industrial, and
medical customers based on marketing information obtained prior to the design
phase of the display and was first offered for sampling in April 2001. Our
stereovision-capable SVGA-3D microdisplay (1.44 million picture elements) was
designed with the input of multiple customers to principally target the mobile
personal computer (PC) and PC games markets, and was first shipped in February
2002. We are currently far along in developing a military and industrial
oriented ultra-high-luminance SXGA resolution integrated circuit (3.9 million
picture elements) that is due for completion in 2002, and we have shipped
limited quantities of prototypes of our eGlass headsets. (See "Our Products").
Near term sales efforts have been focused on our military, industrial, and
media customers. Our primary production orders and design wins to date have been
for the SVGA+ display. To date, we have shipped products and evaluation kits to
more than 60 OEM customers. OEM evaluation and product design cycles may take
from 6 months to 24 months. Some of our initial customers have completed their
initial evaluation cycle and we are now receiving follow-on orders and
notification of product purchase decisions. Several customers have indicated
their intent to incorporate potentially high volumes of our microdisplays into
consumer products during 2002 through 2004. We have also received notification
that our microdisplays will be used as components in version 1.0 of the US Army
Land Warrior program and in the US Air Force Joint Strike Fighter program.
General Sales and Marketing Effort:
We primarily provide display components and MicroviewerTM display-optic
modules for OEMs to incorporate into their branded products and sell through
their well-established distribution channels. In addition, we market
head-wearable displays directly to various vertical market channels, such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.
As a market-driven company, we assess customer needs both quantitatively
and qualitatively, through market research and direct communications. Because
our microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define our
products to optimize the final design, typically on an engineer-to-engineer
basis.
We identify companies with end products and applications for which we
believe that our products will provide a system level solution and for which our
products can be a key differentiator. We target both market leaders and select
early adopter companies; their acceptance validates our technology and approach
in the market. We believe successful marketing will require relationships with
recognized consumer brand companies.
OEMs develop designs to enable them to develop products for their own
target markets. An OEM design cycle typically requires between 6 and 24 months,
depending on the uniqueness of the market and the complexity of the end product.
New product development may require several design iterations prior to
commercialization.
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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. Our
introductory consumer product entry, our SVGA+, is a prime example of a
market-driven product design. After determining the resolution requirements of
key potential customers via direct market studies, we incorporated 52 more
imaging columns than a standard SVGA display. These added columns made it
possible for the SVGA+ display to interface to wide-screen format DVD players
using all the data from the player (852 x 480 pixels) in a 16:9 wide screen
entertainment format while also having the capability to interface to the
standard SVGA (800 x 600 pixels) analog output of many portable computers.
We incorporate product evaluation feedback into subsequent designs. We gain
a detailed understanding of competitive strengths and weaknesses of our
technology and product designs as well as that of alternate technologies.
To date, we have chosen to focus our efforts on product development and
have maintained a relatively limited marketing capability. As we ramp up
production of our products and expand our markets, we plan to hire additional
technical marketing and customer support staff to increase our coverage of
consumer, industrial, and military market segments. 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. 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.
Research and Development
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 anticipate that
achieving reductions in manufacturing costs will require new technology
developments. We anticipate that improving the performance, capability and cost
of our products will provide an important competitive advantage in our fast
moving, high technology marketplace. Past and current research activities
include 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. During 2002 we plan to focus primarily on near-term product development
projects to meet near-term customer needs during 2002. However, in order to
improve customer satisfaction and simultaneously maximize our margins, as well
as to maintain competitive technology advantages, we believe that it is
important to continue to engage in long-term research and development. During
the past three years, we have spent approximately $38.9 million on research and
23
non-operative much below approximately $11.3 million; in 2000, we spent
approximately $13.3 million; and in 2001, we spent approximately $14.3 million
on research and development. During the same three-year period, we received $4.2
million in funding from US government under research and development cost
sharing arrangements.
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 (See "Strategic
Relationships").
We received a Phase III Small Business Innovation Research grant from the
US Air Force, providing $17.5 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.
Manufacturing Facilities
We are located at IBM's Microelectronics Division facility, known as the
Hudson Valley Research Park, located about 70 miles north of New York City in
Hopewell Junction, New York. We lease approximately 45,000 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. At this time, we owe to IBM previously unpaid lease payments and we
have set aside funds to make such payments in order to maintain our lease. Our
lease runs until 2004 and we have the option to then renew it on the same terms
for five additional one-year terms.
Facilities services provided by IBM include our 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 are currently staffing for a
two-shift/5 day per week operation. We believe that our facility is capable of
producing over 50,000 SVGA+ or SVGA-3D displays per month once we are
manufacturing around the clock (24 hour/7-days per week) with a fully loaded
manufacturing line.
We lease additional non-cleanroom facilities for chemical mixing, cleaning,
chemical systems, and glass/silicon cutting. OLED chemicals can be purified in
our facility with our equipment, permitting the company to evaluate new
chemicals in pilot production that are not yet available in suitable purity for
OLED applications on the market.
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Our display fabrication process starts with the silicon wafer, which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a combination of internal and external designers with
customer participation, we outsource wafer fabrication.
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in an automated,
hands-free environment suitable for high volume throughput. An automated cluster
tool provides all OLED deposition steps in a highly controlled environment that
is the centerpiece of our OLED fabrication. After wafer processing, each part is
inspected using an automated inspection system, prior to shipment. We have
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.
Our lenses and system development operation at Virtual Vision operates out
of a leased facility in Redmond, Washington. The current facilities include
design stations, computer-aided 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
government products. We plan to outsource high volume head-wearable display
production to low cost plastics, lenses, and assembly manufacturers, including
manufacturers in Asia.
We believe that manufacturing efficiency is an important factor for success
in the consumer markets. We believe that high yield and maximum utilization of
our equipment set will be key for profitability in 2002 and 2003. We believe
that all of the main components for manufacturing success are in place, but we
require additional capital to: (1) staff and train employees for round the clock
operation, (2) build suitable inventory of integrated circuits and other raw
materials, and (3) properly maintain and upgrade the equipment set. The
equipment required for initial profitable production is in place. Some equipment
will be added when our production volume increases. We will ramp production
primarily by adding multi-shift staff and increasing inventory.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures will be
considered for higher quantity OLED production. We currently outsource
integrated circuit fabrication while retaining the OLED application and OLED
sealing processes in-house. We believe that we have a core competency and
manufacturing expertise in OLED application and sealing, and that retaining
these key processes in-house will facilitate protection of proprietary
technology and process know-how which provide us with a competitive advantage.
This strategy will also enhance our ability to continue to optimize and
customize processes and devices to meet customer needs.
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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 miniature
displays a portfolio of more than 75 patents in organic light emitting diode and
optics 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. (See "Strategic Relationships").
We also generate intellectual property as a result of our internal research
and development activities. We currently have a portfolio of 64 issued patents,
approximately 50 patents filed, and additional patent applications in process.
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 that 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 patents 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
We believe that protection of these key enabling technologies and
components to be a fundamental aspect of our strategy to penetrate diverse
markets with unique products. We intend to continue to develop our portfolio of
proprietary and patented technologies at the design, materials, process, and
system levels.
We also rely on proprietary technology, trade secrets, and know-how which
are not patented. To protect our rights in these areas, we require all
employees, and where appropriate, contractors, consultants, advisors and
collaborators to enter into confidentiality and noncompetition agreements. There
can be no assurance, however, that these agreements will provide meaningful
protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information.
26
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.
Competition
We may face competition in the OLED and microdisplay industry from a
variety of companies and technologies. 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 higher volume
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 Microdisplay Corporation,
Three-Five Systems, and Spatial Light among others, although most of the
companies are primarily focusing on projection microdisplays which do not
compete directly with the company. In certain markets, we may also face
competition from developers of transmissive liquid crystal displays, such as
those developed by Kopin, or laser scanning systems, such as those developed by
Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye applications is MicroEmissive Displays
(Britain, a start-up company). We may also compete with potential licensees of
Universal Display Corporation, Cambridge Display Corporation, and Uniax
Corporation, each of which license OLED technology portfolios. 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 and therefore, we believe that they may incorporate our
technology into their products when it becomes available.
Employees
As of February 15, 2002, we had a total of 34 employees. Prior to our work
force reduction on December 3, 2001, we had a total of 91 employees. 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.
27
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 35,000 square
feet of space houses our own equipment for OLED microdisplay fabrication, and
for research and development plus additional space for assembly operations and
storage. Approximately 10,000 square feet of space is used for administrative
offices. We are required to pay $230,000 to IBM by April 30, 2002 in order to
avoid default proceedings. 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.
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.
Potential Liabilities: We have liabilities for approximately $3.5 million
for unpaid bills, contracts, and other liabilities. We believe that some of
these liabilities are valid and payable, and others may be negotiated or are not
wholly valid. It is possible that we may be required to pay this entire amount
along with additional legal and defense costs or penalties.
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.
28
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, markdown or commissions and may not represent actual
transactions.
High Low
2001
First Quarter 7.98 2.50
Second Quarter....................................4.45 2.10
Third Quarter.....................................2.60 1.10
Fourth Quarter....................................1.65 0.27
As of March 1, 2002, there were 25,171,183 shares of common stock outstanding.
2000
First Quarter through March 16, 2000.............20.62 5.93
Second Quarter since March 17, 2000..............22.93 19.50
Second Quarter...................................20.25 8.50
Third Quarter....................................13.00 7.87
Fourth Quarter....................................9.75 2.04
As of December 31, 2001 and March 29, 2002, there were approximately 425
and 450 stockholders of record of our common stock, respectively. This does not
reflect those shares held beneficially or those shares held in "street" name. In
the second quarter of 2001 in preparation of our proxy mailing, it was
determined that we had approximately 11,000 shareholders of which the vast
majority were held in the street name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
Recent Issuances Of Unregistered Securities.
We entered into a securities purchase agreement dated as of September 18,
2001 with SK Corporation, an affiliate of SK Group of Korea, providing for the
29
investment by SK Corporation of $3,000,000 in eMagin. For its $3 million
investment, SK received (i) 4% Series A Convertible Debentures of the Company in
an aggregate principal amount of $3,000,000, and (ii) warrants exercisable for a
period of three (3) years to purchase 205,479 shares of common stock of eMagin.
Interest is payable on the debentures at a rate of 4% per annum and, at the
option of the Company, may be paid through the delivery of shares of common
stock of the Company (registered pursuant to the registration rights agreement
described below) in lieu of cash interest payments. Subject to certain
limitations, the debentures may be converted, at the option of the holder, in
whole or in part, into our common shares with a conversion price equal to 105%
of the volume weighted average of the closing prices of our shares as reported
on the American Stock Exchange for the ten (10) trading days immediately
preceding the closing date of the transaction. The warrants have an exercise
price of $1.46. The total amount of our shares potentially issuable pursuant to
the conversion feature and the warrants is 2,909,229 shares. Concurrently with
the securities purchase agreement, we also entered into a registration rights
agreement with SK that requires us to register the shares issuable pursuant to a
conversion of the debentures, payment of interest thereon, or an exercise of the
warrants. The registration rights agreement requires us to use our reasonable
best efforts to file the registration statement with the Securities and Exchange
Commission (the "Commission") no later than 270 days after the issuance and sale
of the debentures and warrants. We relied on Section 4(2) of the Securities Act
of 1933 (the "Securities Act") and on Rule 506 of Regulation D in issuing the
securities without registering the offering under the Securities Act.
On August 20, 2001, we entered into a Note Purchase Agreement with the
Travelers Insurance Company whereby Travelers agreed to lend us $1,000,000 in
exchange for a $1,000,000, 9.25% per annum note due on May 20, 2002. The note is
convertible upon the closing by us of a bona fide sale of convertible debt
securities in which we receive at least $5 million prior to the maturity date.
Upon such conversion, the aggregate principal amount and accrued interest of the
note shall convert into the amount of convertible debt securities and other
securities that we would issue to an investor for such amount pursuant to such
bona fide sale. We may prepay the note in full at any time prior to the maturity
date without penalty. The agreement also provided that if the note is not repaid
or converted in accordance with its terms at the end of each week after the
closing date of the transaction (each such date, a "Warrant Issue Date") then we
would, at the end of each such week, issue to Travelers a three-year warrant to
purchase shares of eMagin's common stock for an aggregate exercise price of
$50,000, at a price per share equal to 106% of the volume weighted average price
of the common stock on the American Stock Exchange for the 20 trading days
immediately prior to that Warrant Issue Date. The note also provides that upon
the closing of a sale, prior to the note's maturity date, of convertible debt
securities of the Company in which we receive gross proceeds of at least $5
million, the aggregate principal amount of and accrued interest on the note
shall convert into the amount of convertible debt securities and other
securities of eMagin that would be issued by us to an investor of such amount in
that round of financing. Traveler's subsequently agreed to cap the warrants
issuable under the agreement to 451,842 shares of our common stock, all of which
have been issued. We relied on Section 4(2) of the Securities Act and on Rule
506 of Regulation D in issuing the securities without registering the offering
under the Securities Act.
We entered into a Common Stock Purchase Agreement dated as of October 18,
2001 with a developer and manufacturer (the "Manufacturer") of certain materials
30
used in our products and a concurrently executed Development and Supply
Agreement, also with the Manufacturer. Under the Common Stock Purchase
Agreement, Manufacturer purchased approximately 86,038 restricted shares of our
common stock for a purchase price equal to $126,475 dollars, based on a purchase
price per share calculated as the average sale price of a common share of our
stock on the American Stock Exchange for a twenty day trading period ending on
the day preceding the closing of the transaction. The purchase price was
received by us by the shipment to us of product by the Manufacturer and by the
transfer to us by the Manufacturer of certain rights to designs and related
technology and materials as described in the Development and Supply Agreement.
We relied on Section 4(2) and on Regulation S of the Securities Act in issuing
the securities without registering the offering under the Securities Act.
On November 27, 2001, we entered into a Secured Note Purchase Agreement
whereby five accredited investors agreed to lend us an aggregate of $875,000 in
exchange for (i) 9.00% per annum Secured Convertible Promissory Notes in an
aggregate principal amount of $875,000 and (ii) warrants exercisable for a
period of three (3) years to purchase up to an aggregate of 359,589 shares of
common stock of eMagin. The terms of the outstanding notes and warrants are
described further below.
On January 14, 2002, we entered into additional agreements to facilitate:
(i) an additional funding of $1,000,000 to eMagin by a private investor under
the Secured Note Purchase Agreement, (ii) the repayment (the "Repayment") in
full using the proceeds of the additional funding of three secured convertible
notes held by certain initial investors under the Secured Note Purchase
Agreement with an aggregate principal amount of $250,000 (such notes then in
default pursuant to a monthly expenditure requirement contained therein), and
(iii) a repricing of both the conversion rate of all of the outstanding Secured
Convertible Notes issued under the Secured Note Purchase Agreement into our
common stock and the exercise price of the warrants held by certain initial
investors not subject to the Repayment (the "Continuing Investors") and the
issuance of certain additional warrants to the Continuing Investors in return
for their consent to certain amendments and waivers. In return for the
additional funding of $1,000,000, the private investor received two additional
Secured Convertible Promissory Notes, with an aggregate principal amount of
$300,000 and $700,000, respectively, and related warrants, each issued pursuant
to the terms of the Secured Note Purchase Agreement. The full amount of the
outstanding secured convertible notes issued under the Secured Note Purchase
Agreement, after giving effect to the January 2002 transactions, have an
aggregate principal amount of $1,625,000, and are all secured by a general
security interest in the assets of the Company.
The outstanding Secured Convertible Promissory Notes are due August 30,
2002 and bear interest at 9% per annum (payable at maturity or on the effective
date of an early termination). Pursuant to the January 2002 transactions, the
conversion terms of the outstanding secured notes were adjusted so that the
notes are convertible into our common stock at a rate of $0.5264 per share. The
conversion of the notes into eMagin common stock is mandatory upon certain
conditions including the completion of a next round of financing by the Company
of convertible debt securities or equity securities in a minimum amount of $10
million. The holders of the notes may also convert, at their option, the notes
and accrued interest into our common stock. Upon a change of control event, we
may also call and purchase the notes at a purchase price equal to 250% of the
principal amount plus accrued interest. If we do not exercise this call right,
31
the holders may put the notes to the Company at similar pricing. Pursuant to the
terms of the January 2002 transactions, the exercise price of the outstanding
three year warrants held by the Continuing Investors was adjusted to $0.5469 per
share. The Initial Investors whose secured convertible notes were cancelled
pursuant to the Repayment retained the three-year warrants previously issued to
them under the Purchase Agreement, which have an exercise price of $1.67 per
share. All of the outstanding warrants issued under the Secured Note Purchase
Agreement, including those issued pursuant to the January 2002 transactions
described above, are exercisable for an aggregate of up to 1,954,944 shares of
our common stock. We relied on Section 4(2) of the Securities Act and on Rule
506 of Regulation D in issuing the securities without registering the offering
under the Securities Act.
Pursuant to the issuance of the notes and warrants under the Secured Note
Purchase Agreement, we also entered into a registration rights agreement
providing for the registration of shares to be issued pursuant to a conversion
of the Secured Convertible Promissory Notes and the shares to be issued pursuant
to the exercise of the warrants issued thereunder. The registration rights
agreement required us to file a registration statement no later than 90 days
after the issuance of the notes and warrants at the initial closing. We are
currently in default of this filing requirement, however management is confident
that the holders of such rights are amenable to waiving and extending the time
period for the filing of the registration statement. Pursuant to a failure by us
to use our reasonable best efforts to cause the registration statement to be
declared effective by the Commission within six months of the date of the
issuance of the Secured Convertible Promissory Notes and warrants, the
registration rights agreement provides for the payment of liquidated damages at
a rate of five percent (5%) per month (calculated to the nearest calendar day)
of the value of the registrable securities not so declared effective until such
registrable securities shall be declared effective.
We entered into a Securities Purchase Agreement dated as of February 27,
2002 providing for the issuance and sale to eight accredited investors of an
aggregate of (i) 3,617,128 restricted shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years for an aggregate of
1,446,852 shares of our common stock. The warrants have an exercise price of
$0.7542. For the issuance of the shares and warrants, we received an aggregate
gross proceeds of $2,500,519.56, with each share purchased at a purchase price
of $.6913, equal to 110% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for a prescribed five
trading day period. In connection with the sale of the shares and warrants, we
also entered into a registration rights agreement with the investors to register
for resale the shares the investors bought in the transaction and the shares to
be issued pursuant to an exercise of the warrants. Under the terms of the
registration rights agreement, if the registration statement covering the resale
of the shares is not declared effective by the Commission within ninety days (or
one hundred and fifty days in the case of a "full review" by the Commission) of
the date of the issuance and sale of the purchased shares and the warrants,
eMagin will be required to pay to each investor an amount equal to one percent
(1%) per month of (A) the purchase price paid by such investor for the purchased
securities, and (B) the value of any outstanding warrants held by such investor
until such registration default no longer exists. The accrued penalties payable
for a registration default under the registration rights agreement may be paid
in our common shares provided such shares are registered under the Securities
Act. The issuance of the shares and the warrants was exempt from the
32
registration requirements of the Securities Act pursuant to Section 4(2) of such
Securities Act and Regulation D promulgated thereunder.
On March 4, 2002, we entered into a common stock purchase agreement and
related documents with Northwind Associates, Inc., a Cayman Islands corporation
(the "Investor"), pursuant to which we may receive in periodic draw downs at our
option and subject to the terms and conditions of the agreement, up to
$15,000,000 in equity financing (the "Equity Line") over a three year period.
The aggregate amount of the Equity Line may increase to $20,000,000 provided
certain additional conditions regarding our share price, trading volume and
market capitalization are met. The initial closing of the agreement occurred on
Friday, March 22, 2002. Our right to draw down on the Equity Line is subject to
our registering for resale (and the continuing effectiveness of such
registration) with the Commission the shares of eMagin common stock issuable
pursuant to the Equity Line and is also subject to certain other significant
conditions, including limits as to the maximum and minimum draw down amounts as
specified in the common stock purchase agreement. The maximum investment amount
for any draw down is the lesser of (i) $5,000,000, and (ii) 15% of the volume
weighted average price for our common stock (as reported by the American Stock
Exchange) for the 30 trading days immediately prior to the applicable
commencement date for such draw down multiplied by the total aggregate trading
volume in respect of our common stock for such period. Pursuant to a draw down,
the Investor will purchase our shares at a discount to the price of our common
shares on the American Stock Exchange. More specifically, the discounted
purchase price to be paid by the Investor under the Equity Line will generally
equal (i) 88% of the daily volume weighted average price of our common stock on
the American Stock Exchange for a prescribed 10 trading day period provided that
the such stock price is less than $4.00 per share at the time of determination,
(ii) 90% should such stock price at the time of determination exceed $4.00 per
share, and (iii) 92% should such stock price at the time of determination exceed
$6.00 per share. The discounted purchase price may be reduced by an additional
3% pursuant to certain special conditions as set forth in the agreement. The
amount of our shares issued pursuant to draw downs on the Equity Line is also
limited to 19.9% of the issued and outstanding common stock (unless stockholder
approval of any excess amount is received) and no draw down shall be made to the
extent that it would result in the Investor and its affiliates beneficially
owning more than 9.9% of our outstanding common stock. The agreement also limits
our ability to enter into any other equity line type of financing during the
term of the agreement and provides to the Investor a right of first refusal for
subsequent sales by the Company of its securities.
Additionally, in consideration for the Investor's purchase commitment under
the Equity Line and certain costs associated therewith, we issued to the
Investor 30,000 unregistered shares of eMagin's common stock and warrants to
purchase up to 150,000 shares of our common stock at an exercise price equal to
115% of the daily volume weighted average price of the common stock for the
fifteen trading days preceding the date of the delivery of the warrant by the
Company or $0.8731. Each warrant is exercisable for a period of three years
commencing six months from the date of their delivery by the Company. The
issuance of the shares and the warrants was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of such Securities
Act and Regulation D promulgated thereunder.
33
In connection with the Equity Line, we also entered into a registration
rights agreement dated as of March 4, 2002 with the Investor that requires the
Company to file, obtain and maintain the effectiveness of a registration
statement on an appropriate form with the Commission in order to register the
sale and public resale of shares of the common stock acquired by the Investor
under the agreement and upon the exercise of the warrants. Under the terms of
the registration rights agreement, the Company must file such registration
statement within sixty days of the date of the agreement.
34
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,
1997, 1998, 1999, 2000, and 2001 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,
------------------------------------------------------------------
1997 1998 1999 2000(1) 2001
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues:
Net Contract Revenues............. $3,626 $6,154 $1,895 $3,126 $5,005
Product Sales 842
Total revenue.............. 3,626 6,154 1,895 3,126 $5,847
Costs and Expenses:
Research and Development (net
of funding under cost sharing
arrangements)
5,234 10,250 10,171 11,815 12,724
Non-cash expense for
conversion of debt to common --------
stock ............................ -- 1,917 -- --
--
Non-cash stock-based
compensation...................... -- -- -- 10,319 2,841
Amortization of purchase
intangibles....................... -- -- -- 20,932 17,887
Write-down of goodwill and
purchased intangibles -- -- -- -- 32,146
Acquired in-process research
and
35
Fiscal Year Ended December 31,
------------------------------------------------------------------
1997 1998 1999 2000(1) 2001
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
development .................. -- -- -- 12,820 --
General and Administrative........
2,015 3,514 5,203 6,145 7,385
Loss from operations................ (3,623) (7,610) (15,396) (58,905) (67,136)
Other income (expense).............. (107) (122) (404) (2,616) (1,351)
Net loss............................ (3,730) (7,732) (15,800) (61,521) (68,487)
---------------------------------
Basic and diluted net $(.69) $(1.42) $(6.04) $(2.78) $(2.73)
loss per share......................
Weighted average shares
outstanding used in basic and
diluted per-share calculation... 5,437,537 5,450,293 2,614,743 22,144,904 25,100,211
(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
------------------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN THOUSANDS)
Working capital (deficit)............ $ 2,888 $ 3,371 $(3,295) $ 6,243 $(5,491)
Total assets......................... 6,906 11,163 5,038 62,549 4,914
Current maturities of
long-term debt..................... -- 62 269 313 693
Short-term debt...................... -- -- 2,127 -- 1,875
Total shareholders' equity .......... $ 1,016 $ 4,693 $60 $59,184 $(4,878)
36
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
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. We shipped initial
samples of our first commercial microdisplay product in March 2001. We are now
accepting orders for larger quantities of our first microdisplay product and
shipping samples of our second commercial microdisplay product. These products
are being applied or considered for near-eye and headset applications in
products such as entertainment and gaming headsets, handheld Internet and
telecommunication appliances, viewfinders, and wearable computers to be
manufactured by original equipment manufacturer (OEM) customers.
Company History
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 its acquisition of FED Corporation, 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 agreement that facilitated our acquisition of
FED Corporation, 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.
37
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
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142
effective January 1, 2002. The Company is currently evaluating the effect that
the adoption of the provisions of SFAS No. 142 will have on its results of
operations and financial position.
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. The Company's ability to realize its goodwill is
dependent upon its ability to raise sufficient financing in order to expand the
rollout and commercialization of its products. In the third quarter of 2001, the
Company was able to secure a limited amount of additional financing to fund its
operations, however, such financing was not in the amount the Company expected
to be able to secure, nor was it enough to rollout commercialization of its
product on a wide scale basis, as had been contemplated by its business plan.
Based on these factors, the Company revised its future business plan and
evaluated the carrying value of the identifiable intangible assets and goodwill
that was a result of its acquisition of FED. Based on this evaluation, the
Company determined that the assets were impaired, and, accordingly, during the
quarter ended September 30, 2001, the Company recorded an impairment write-down
of its goodwill and other identifiable intangible assets of approximately $32.1
based on the estimated discounted net cash flow to be generated over the
remaining life of the assets. The impairment charge is included in the
consolidated statement of operations for the year ended December 31, 2001.
Inclusive of this impairment write-down, amortization of purchased intangibles
expense for the year ended December 31, 2001 was approximately $50.0 million.
38
As of December 31, 2001, other intangible assets were comprised of the following
(in millions):
Purchased identifiable intangibles 18.0
Less: Accumulated amortization (16.3)
Other intangible assets, net $ 1.7
Since for the three-year 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 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. 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 included herein for further detail on the results of eMagin and FED
Corporation for their respective periods of ownership.
At our annual meeting of stockholders held on July 16, 2001, the
stockholders approved the reincorporation of eMagin Corporation as a Delaware
corporation. The reincorporation became effective on July 16, 2001 by merging
eMagin Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly
owned subsidiary, eMagin Corporation, a Delaware corporation (formerly known as
FED Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
common stock at the time the merger became effective. There has been no
interruption in the trading of our common stock as a result of the
reincorporation. The reincorporation also resulted in the implementation of a
new certificate of incorporation and by-laws for the Company, as the existing
certificate of incorporation and by-laws of eMagin-Delaware continues as the
certificate of incorporation and by-laws of the Company and has replaced the
articles of association and by-laws of eMagin-Nevada. No change in the corporate
name, board members, business, management, fiscal year, assets, liabilities,
employee benefit plans or location of principal facilities of eMagin occurred as
a result of the reincorporation.
Our history has been as a developmental stage company. We are now
transitioning to manufacturing and intend to significantly increase our
marketing, sales, and research and development efforts, and expand our operating
infrastructure. Most of our operating expenses are fixed in the near term. If we
are unable to generate significant revenues, our net losses in any given period
could be greater than expected.
39
STATEMENT OF OPERATIONS
The following are descriptions of the revenue and expense components of our
statement of operations:
Total 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 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, 2001, the remaining amounts to be incurred and billed on these
active "cost sharing" contracts totaled approximately $0.7 million and $0.3
million, respectively.
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 than 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.
40
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.
Results of Operations
Comparison of our financial results for the years ended December 31, 1999,
2000 and 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues increased to $5.8 million for the year ended December 31, 2001
from $3.1 million for the year ended December 31, 2000, representing an increase
of 87%. 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 $14.3 million for the
year ended December 31, 2001 from $13.3 million for the year ended December 31,
2000, representing a 7.5% increase. Of these amounts, we received $1.6 million
in cost sharing from the U.S. government for the year ended December 31, 2001,
and $1.5 million for the year ended December 31, 2000. The $1.0 million increase
in gross expenses for the year ended December 31, 2001 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 $2.8 million for the year
ended December 31, 2001 versus $10.3 million for the year ended December 31,
2000. The activity, for the years ended December 31, 2001 and 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 and Write-Down of Goodwill and Purchased Intangibles
Amortization and write down of goodwill and purchased intangibles expense
increased to $50.0 million for the year ended December 31, 2001 from $20.9
million for the year ended December 31, 2000. The $29.1 million increase in
amortization and impairment write-down of its goodwill is primarily the result
of the impairment charge recorded in 2001.
41
Acquired In-Process Research and Development
In connection with the merger in March 2000, we allocated $12.8 million of
the purchase price to acquired in-process research and development expense.
Accordingly, these costs were expensed during the year ended December 31, 2000
upon finalization of a third party appraisal. No costs were expensed during the
year ended December 31, 2001.
General and Administrative Expenses
General and administrative expenses increased to $7.4 million for the year
ended December 31, 2001 from $6.1 million for the year ended December 31, 2000,
representing a 21.3% increase. The $1.3 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 decreased to $1.4 million for the year ended December 31,
2001 from $2.6 million for the year ended December 31, 2000. The decrease of
$1.2 million was due primarily to the decrease in amortization of the debt
discount from the beneficial conversion of a bridge loan entered into by the
company.
Net Loss/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, 2001, 2000 and 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.
2001 2000 1999
---- ---- ----
Loss attributable to common shareholders
Net loss $(68,486,735) $(61,521,866) $(15,800,245)
Effect of induced conversion $(7,576,862)
of Convertible Preferred Stock
Loss attributable to common shareholders $(68,486,735) )$(61,521,866) $(23,377,107)
Weighted average shares outstanding 25,100,211 22,144,904 2,614,743
Basic and diluted loss per common share $ (2.73) $ (2.78) $ (8.94)
42
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 OLED microdisplays.
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.
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,
43
registration requirements of the 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.
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 additional
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through December 31,
2001 we have incurred accumulated losses of approximately $116.7 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, 2001, we had $0.7 million in cash and cash
equivalents and a working capital deficit of $5.5 million. We subsequently
received approximately $3.2 million in equity and convertible debt, and we
received a commitment for a $15 million private placement (See "Recent Issuances
Of Unregistered Securities"). Subsequent to year end we have raised
approximately $3.2 million in various debt and equity transactions to support
our current operations. In December 2001, we reduced our workforce due to our
working capital constraints. Subsequent to year end, we rehired approximately 8
of the previously terminated employees after raising such capital to pursue
production of our products.
Net cash used in operating activities was $10.8 million for the year ended
December 31, 2001. 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 2000 was $14.5 million and $8.6 million in 1999
resulting primarily from operating losses.
Net cash used by investing activities was $0.5 million for the year ended
December 31, 2001. This represented net cash used of $0.5 million for capital
expenditures. Net cash used by investing activities in 2000 was $0.4 million
primarily from net cash acquired in acquisition of $1.2 million, offset by $0.8
million used for capital expenditures. In 1999, net cash used in investing
activities was $0.3 million primarily for capital expenditures.
Net cash provided by financing activities was $4.7 million for the year
ended December 31, 2001, and consisted primarily of proceeds from the issuance
of debt. 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
44
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.
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. eMagin'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 described in Note 1 to the Item 8 (Financial Statements and
Supplementary Data).
Pursuant to a Registration Rights Agreement dated November 27, 2001 by and
between the Company and investors named therein, we may be forced to pay certain
liquidated cash damages in the near future if we fail to use our reasonable best
efforts to cause the registration statement thereunder to be declared effective
by the Commission by May 27, 2002.
Our primary sources of liquidity on a short term basis can be expected to
be met through cash generated from debt, equity financing and US Government
contract cash receipts.
On a long-term basis, our liquidity requirements can be expected to be met
through cash generated from operations, US Government contract cash receipts and
equity financing.
We have liabilities for approximately $3.5 million for unpaid bills, rent
and operating leases, that are in default, contracts, and other liabilities.
These items could materially affect our liquidity, if we are not successful in
negotiating acceptable settlements or reasonable repayment terms. It is possible
that we may be required to pay this entire amount along with additional legal
and defense costs or penalties. We need to raise substantial additional equity
or debt financing in the near future in order to continue our development growth
and commercialization of our products. 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 and our
ability to continue as a going concern. In the event that we raise additional
equity financing, further dilution to investors could result. Section 7A below,
under "Risks Related To Our Financial Results," provides a more detailed
description.
45
Unaudited Quarterly Results of Operations for the Years Ended December 31, 2001,
2000 and 1999
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
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 July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no maximum
46
life). The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company is required to
adopt SFAS No. 142 effective January 1, 2002. eMagin is currently evaluating the
effect that the adoption of the provisions of SFAS No. 142 will have on its
results of operations and financial position.
In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires obligations associated with the
retirement of long-lived assets to be recorded as increases in costs of the
related asset. Also, on October 3, 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144
develops one accounting model for determining impairment based on the model in
SFAS No. 121, and for long-lived assets that are to be disposed of by sale,
requires them to be disposed of at the lower of book value or fair value less
cost to sell. SFAS No. 144 expands the scope of "discontinued operations." The
new rules will be applied prospectively beginning January 1, 2002. Management
does not expect the adoption of these statements to have a material impact to
its financial statements.
ITEM 7A: QUALITATIVE AND QUANTITATIVE Disclosures About Market Risk
This Form 10-K report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
Interest Rate 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, 2001, 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.
47
Foreign Currency Exchange 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.
Risk Factors
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks in addition to the other information in
this 10-K or in the documents referred to in this 10-K. Any of the following
risks could have a material adverse impact on our business, operating results
and financial condition and result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2001 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the year ended
December 31, 2001 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
48
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, including, in the case of our
common stock selling for a substantial period of time at a low price per share,
effecting a reverse split of such shares within a reasonable time after being
notified by the Exchange that such action is appropriate under all the
circumstances. In its review of whether a share price is too low or whether a
reverse split is appropriate, the Exchange will consider all pertinent factors,
including market conditions in general, the number of shares outstanding, plans
which may have been formulated by management, applicable regulations of the
state of incorporation or of any governmental agency having jurisdiction over
eMagin, and the relationship to other Exchange policies regarding continued
listing. If the Exchange were to determine that our share price is too low and
that we should reverse split our shares but we were unable to comply for any
reason, our common stock may be delisted from the Exchange. Delisting of our
common stock could materially adversely affect the market price, the market
liquidity of our common stock and our ability to raise necessary capital.
Moreover, it would likely be more difficult to trade in or to obtain accurate
quotations as to the market price of our common stock.
We have a history of losses since our inception and expect to incur losses for
the foreseeable future. Accumulated losses excluding non-cash transactions as of
December 31, 2001, were $27.5 million and acquisition related non-cash
transactions were $89.2 million which resulted in an accumulated net loss of
$116.7 million, the majority of which was related to the March 2000 merger and
its subsequent write-down of its goodwill. The non-cash losses were dominated by
the amortization and write-down of goodwill and purchased intangibles and
write-down of acquired in process research and development related to the March
2000 acquisition, and also included some non-cash stock-based compensation. We
have not yet achieved profitability and we can give no assurances that we will
achieve profitability within 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. The government at its discretion
may terminate our government contracts. 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.
49
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, or the sublicensing by
Eastman Kodak of our OLED technology to third parties, 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 OLED technology for microdisplay
applications to others who have the potential 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, our technology may be available to licensees of Eastman Kodak, 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. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
recently been in a financial position to file for patents on a worldwide basis
and may not be in a position to do so for some time even if sufficient funding
is available for our production and sales ramp. We continue to protect all our
intellectual property as trade secrets and continue to prosecute patent
applications for key technology.
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
50
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: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and 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.
The display industry is cyclical. The display industry is characterized by
fabrication facilities that require large capital expenditures and long lead
times go construct leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
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 liquid
crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS displays are currently in initial production, and may be in
higher 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. As the microdisplay market
develops, 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 from emerging companies attempting to obtain a share of the
various markets in which our microdisplay products have the potential to
compete.
51
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 incorporation of our products into OEM consumer
products is 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 affect 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 large commercial quantities
and we do not know if our manufacturing yields or throughput 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 quantity
commercial production of any of our OLED-based products and we are not staffed
adequately to run high quantity production. 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 2002 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
52
once we commence volume production we will attain yields at high throughput that
will result in profitable gross margins or that we will 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. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully.
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. We also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or 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 to match the varying
requirements of different customers in order to establish a competitive position
and become profitable. Furthermore, we must adopt our products and processes to
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.
53
Our microdisplay business may not be successful. The market for microdisplays
may develop later than anticipated by us may therefore limit our sales potential
for the foreseeable future.
We generally do not have long term contracts with our customers. Our business is
operated on the basis of short term purchase orders and we cannot guarantee that
we will be able to obtain long term contracts for some time. In the absence of a
backlog of orders that can only be canceled with penalty, we plan production on
the basis of internally generated forecasts of demand which makes it difficult
to accurately forecast revenues. If we fail to accurately forecast operating
results, out business may suffer and the value of your investment in the Company
may decline.
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 that the alliances we do
enter in to will realize their objectives. 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 or continue existing
operations 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 our shareholders or us. 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. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. In addition, many of the OEMs which are the most likely
long term purchasers of our microdisplays are located abroad exposing us to
additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could give
expose us to various risks including management of a multi-national
54
organization, the complexities of complying with foreign law and custom,
political instability and the complexities of taxation in multiple
jurisdictions.
Our business may expose 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.
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 cannot assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale
could cause our common stock price to decline even if the Company is successful.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of March 1, 2002, we have outstanding options to
purchase 5,514,958 shares; most are currently locked-up due to contractual
restrictions. The restrictions on the sale of the remaining shares will lapse
between June 16, 2002 and January 7, 2003. There are also outstanding warrants
to purchase 3,342,435 shares of common stock.
We do not intend to pay dividends; you will not receive funds without selling
shares; and you may lose the entire amount of your investment. We have not paid
any dividends on our common stock and we do not plan to pay cash dividends in
the foreseeable future. We intend to retain our earnings, if any, for use in our
business. We further cannot assure you that you will receive a return on your
investment when you sell your shares or that you will not lose the entire amount
of your investment.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock. Current directors and officers of eMagin
Corporation or their affiliates beneficially own a large percentage of our
outstanding common stock. If these shareholders were to vote together, they
55
could significantly influence the outcome of items that are submitted to a vote
of the shareholders including the election of our directors.
We have a staggered Board of Directors and other anti-takeover provisions which
could inhibit potential investors or delay or prevent a change of control that
may favor you. Our Board of Directors is divided into three classes and our
Board member are elected for terms that are staggered. This could discourage the
efforts by others to obtain control of the company. Some of the provisions of
our certificate of incorporation, our bylaws and Delaware law could, together or
separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
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: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
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.
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. Prices and trading volume for technology related stock has
been highly volatile. Accordingly, our stock prices are likely to also be highly
volatile. Shareholders 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: our perceived prospects; quarter to quarter variations in our
operating results; changes in earnings estimates or recommendations by
securities analysts and market perceptions of our operating results in relation
to those estimates or recommendations; changes in market valuation of companies
in the microdisplay systems industry; announcements of technological innovations
or new products by us or our competitors; economic, political, and issues
associated with our customers, suppliers, partners, accountants, governmental
agencies in the USA and elsewhere, or other parties; sales of shares by other
shareholders; and 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.
56
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)............... 57
Report of Independent Public Accountants (Barry L. Friedman)..................58
Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000.... 60
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999 and for the period from inception (January 23, 1996) through
December 31, 2001 ........................................................... 61
Consolidated Statements of Shareholders' Equity for the period from
inception to December 31, 1996 and each of the five years ended
December 31, 2001.............................................................62
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999 and for the period from inception (January 23, 1996) through
December 31, 2001.............................................................64
Notes to the Consolidated Financial Statements................................66
FINANCIAL STATEMENTS FOR FED CORPORATION (PREDECESSOR)
Report of Independent Public Accountants......................................81
Consolidated Statements of Operations for the period from January 1, 2000
to March 15, 2000 (unaudited), the year ended December 31, 1999 and for
the period from inception (January 6, 1992) through December 31, 1999.........83
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.............................................................86
Consolidated Statements of Cash Flows for the period from January 1, 2000
to March 15, 2000 (unaudited), the year ended December 31, 1999 and for
the period from inception (January 6, 1992) through December 31, 1999.........88
Notes to the Consolidated Financial Statements................................90
57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated balance sheets of eMagin
Corporation (a Delaware corporation in the development stage; see Note 1) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from inception
(January 23, 1996) to December 31, 2001. 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 have not audited
the financial statements of the Company from inception to December 31, 1999.
These financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception to December 31, 1999, is based solely on the report of
other auditors.
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, based on our audits 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,
2001 and 2000, and the results of their operations and their cash flows for the
years then ended, and for the period from inception to December 31, 2001, 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 and the working capital deficit 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
March 13, 2002
58
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.
59
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 738,342 $ 7,367,257
Contract receivables 485,021 825,733
Costs and estimated profits in excess of billings
on contracts in progress 293,273 627,347
Inventory 90,720
-
Prepaid expenses and other current assets 388,344 665,222
------------- -------------
Total current assets 1,995,700 9,485,559
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,166,509 1,268,304
GOODWILL AND PURCHASED INTANGIBLES, net 1,657,238 51,689,938
OTHER LONG-TERM ASSETS 94,367 105,394
------------- -------------
Total assets $ 4,913,814 $ 62,549,195
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 3,116,558 $ 161,025
Accrued payroll 788,302 1,376,888
Accrued expenses 615,418 935,746
Advance payments on contracts to be completed 289,538 311,812
Current portion of long-term debt 693,197 313,074
Other short-term debt 1,875,000 -
Other current liabilities 108,805 144,000
------------- -------------
Total current liabilities 7,486,818 3,242,545
------------- -------------
LONG-TERM DEBT 2,305,184 122,984
------------- -------------
COMMITMENTS and Contingencies (Note 9)
SHAREHOLDERS' EQUITY (DEFICIT):
---------------------------------------------------------
Common stock, $0.001 par value, 100,000,000 and
40,000,000 shares authorized, 25,171,183 and
25,069,143 shares issued and outstanding, 25,171 25,069
respectively
Additional paid-in capital 114,058,560 116,622,811
Deferred compensation (2,277,367) (9,266,397)
Deficit accumulated during the development stage (116,684,552) (48,197,817)
------------- -------------
Total shareholders' equity (deficit) (4,878,188) 59,183,666
------------- -------------
Total liabilities and shareholders'
equity (deficit) $ 4,913,814 $ 62,549,195
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
60
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999
and for the period from inception (January 23, 1996) to December 31, 2001
Period from
Inception
(January 23,
1996) to
December 31,
2001 2000 1999 2001
------- ------- ------- ------------
REVENUES:
Contract revenues $5,005,657 $ 2,557,587 $ - $7,563,244
Product sales 841,713 - - 841,713
---------- ----------- ---------- ----------
Total revenues 5,847,370 2,557,587 - 8,404,957
COSTS AND EXPENSES:
Research and development, net of
funding under cost sharing
arrangements of $1,555,811,
$1,328,121 and $0, 12,724,161 9,634,948 - 22,359,109
respectively
General and administrative 7,385,707 5,149,513 18,452 12,566,219
Amortization of purchased intangibles 17,886,838 20,932,320 - 38,819,158
Write-down of goodwill and
purchased intangibles 32,145,863 - - 32,145,863
Acquired in-process research and
development - 12,820,000 - 12,820,000
Non-cash charge for
stock-based compensation 2,841,003 2,539,828 - 5,380,831
------------ ------------- ------------ ------------
Total costs and expenses, net 72,983,572 51,076,609 18,452 124,091,180
------------ ------------- ------------ ------------
LOSS FROM OPERATIONS (67,136,202) (48,519,022) (18,452) (115,686,223)
OTHER (EXPENSE)/INCOME, NET (1,350,533) 352,205 - (998,328)
------------ ------------ ---------- -------------
Net loss $(68,486,735) $(48,166,817) $(18,452) $(116,684,552)
============ ============ ========== =============
Basic and diluted loss per share $(2.73) $(2.18) $(0.00)
Basic and diluted weighted average
shares outstanding 25,100,211 22,144,904 21,156,400
The accompanying notes are an integral part of these consolidated statements.
61
eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM
INCEPTION (JANUARY 23, 1996) to DECEMBER 31, 1996 and FOR EACH of the FIVE YEARS
ENDED DECEMBER 31, 1997, 1998, 1999, 2000 AND 2001
Deficit
Accumulated
during the
Number of Additional Deferred development
Shares $0.001 par Paid- in Compensation stage Total
value Capital
-------------------------------------------------------------------------------------
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 3,464,547 3,465 23,246,535 - - 23,250,000
$1,000,000
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)
-------------------------------------------------------------------------------------
62
Balance, December 31, 2000 25,069,143 $25,069 $116,622,811 $(9,266,397) $(48,197,817) $59,183,666
Issuance of common stock related
to exercise of warrant 16,002 16 27,507 - - 27,523
Issuance of common stock for
services 86,038 86 116,151 - - 116,237
Issuance of warrants related to debt
financing (Note 5) - - 408,068 - - 408,068
Value related to beneficial conversion
features of debt financings - - 530,473 - - 530,473
Value related to original issue
discount features of debt financings - - 501,577 - - 501,577
Amortization of deferred compensation - - - 2,841,003 - 2,841,003
Reversal of deferred compensation
balance for
forfeited stock options - - (4,148,027) 4,148,027 - -
Net Loss - - - - (68,486,735) (68,486,735)
------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $25,171 $114,058,560 $(2,277,367) $(116,684,552) $(4,878,188)
========== ======= ============ ============ ============== =============
The accompanying notes are an integral part of these consolidated statements
63
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999 and for the period from
inception (January 23, 1996) to December 31, 2001
Period from
Inception
(January 23,
1996) through
December 31,
2001 2000 1999 2001
------- ------- ------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(68,486,735) $(48,166,817) $(18,452) $(116,684,552)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 18,453,461 21,488,686 94 39,942,982
Write-down of goodwill and
purchased intangibles 32,145,863 -- -- 32,145,863
Loss on sale of assets -- 98,548 2,103 97,713
Non-cash charge for stock-based
compensation 2,841,003 2,539,828 -- 5,380,831
Non-cash interest related charges 1,222,562 -- -- 1,222,562
Non-cash charge for services
received 116,151 -- -- 116,151
Acquired in-process research and
development -- 12,820,000 -- 12,820,000
Changes in operating assets and
liabilities:
Contract receivables 340,606 (693,770) -- (353,164)
Costs and estimated profits in
excess of billings on
contracts in progress 334,074 (7,783) -- 326,291
Inventory (90,720) -- -- (90,720)
Prepaid expenses and other
current assets 276,984 (359,506) -- (82,522)
Other long-term assets 11,027 (94,943) -- (83,916)
Advanced payment on contracts to
be completed 86,531 311,812 -- 398,343
Accounts payable, accrued
expenses and other current
liabilities 1,932,619 51,039 -- 1,983,658
---------- ---------- ---------- ----------
Net cash used in operating
activities (10,816,574) (12,012,906) (16,255) (22,860,480)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment (464,829) (803,033) -- (1,267,862)
Net cash acquired in acquisition -- 1,239,162 -- 1,239,162
---------- ---------- ---------- ------------
Net cash (used in) provided by
investing activities (464,829) 436,129 -- (28,700)
The accompanying notes are an integral part of these consolidated statements.
64
eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.)
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999 and for the period from
inception (January 23, 1996) to December 31, 2001
Period from
Inception
(January 23,
1996) to
December 31,
2001 2000 1999 2001
------- ------- ------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sales of common
stock, net of issuance costs -- 21,250,000 -- 21,281,000
Proceeds from exercise of warrants 27,609 -- -- 27,609
Proceeds from debt financing
transactions 4,875,000 -- -- 4,875,000
Re-payments of bridge loan and
obligations under capital
lease (250,121) (2,305,966) -- (2,556,087)
Net cash provided by financing ------------ ------------ --------- ------------
activities 4,652,488 18,944,034 -- 23,627,522
Net (decrease)/increase in cash
and cash equivalents (6,628,915) 7,367,257 (16,255) 738,342
CASH AND CASH EQUIVALENTS,
beginning of period 7,367,257 -- 16,255 --
----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, end of
period $ 738,342 $7,367,257 $ -- $738,342
----------- ----------- --------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 53,436 $ 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.
65
eMAGIN CORPORATION (Formerly Fashion Dynamics Corp.)
(a development stage company)
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 ("FED") (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 limited sales
of preliminary prototype versions of the organic light emitting diode ("OLED")
micro display.
Since its inception, FED has entered into research and development cost-sharing
arrangements, as well as research and development contracts, with several
government agencies and private industry. To date, such arrangements have
provided total funding of approximately $35.5 million, including $32.6 million
by FED prior to the Merger, through cost-sharing and contract revenues. Certain
of these arrangements continue through 2002 and may provide for approximately
$0.5 million of additional funding. Such funding is subject to, among other
factors, satisfactory progress on projects and available government funding.
Through December 31, 2001, the Company had incurred development stage losses
totaling approximately $116.7 million. Prior to the acquisition of FED by FDC,
FED incurred developmental stage losses totaling approximately $52.5 million. At
December 31, 2001, the Company had approximately $1.2 million of cash, cash
equivalents and contract receivables to fund short-term working capital
requirements and approximately $5.5 million of working capital deficiency. 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,
marketing and production 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 financings closed
subsequent to December 31, 2001 (Note 10) and its remaining cash resources at
December 31, 2001, will be sufficient to fund the Company's operations into the
first quarter of 2003 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
66
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. These and other factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result should the
Company be unable to continue in existence. (Also see Liquidity and Capital
Resources section on Item 7 Management's Dicussion and Analysis of Financial
Conditions and Results of Operation and Risks Related to Our Financial Results
section of Item 7A Qualitative and Quantitative Disclosures About Market Risk.)
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, $3.8 million of assumed liabilities and $0.4 million
of acquisition costs. 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: $13.0 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 was being amortized over a three year period. The Company recorded a
goodwill impairment charge of approximately $32.1 million in 2001 and
approximately $17.9 million and $20.9 million in amortization expense related to
goodwill and purchased intangible assets for the years ended December 31, 2001
and 2000, respectively. In accordance with SFAS 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 consolidated statement of operations for
the year ended December 31, 2000.
The following unaudited 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:
2000 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.
67
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 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, as periodically adjusted
to reflect revised agreed upon rates.
Product revenue is recorded when products are shipped to customers, at which
time, title passes to the customer and the Company has no remaining future
obligations. No right of return is provided to the customers who have purchased
the products, and no returns of such goods have been received by the Company to
date.
As of December 31, 2001 and 2000, the Company had received advanced payments on
contracts to be completed of $275,000 and $311,812, respectively. These amounts,
classified as deferred revenues in the accompanying consolidated balance sheets,
represent that portion of amounts billed by the Company, or cash collected by
the Company, for which services have not yet been provided or products have not
yet been delivered.
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, 2001 and 2000 were as follows:
66
2001 2000
------------ -------------
Total costs incurred and estimated profits $ 21,414,000 $ 3,408,000
Less amounts billed 21,121,000 2,781,000
------------ -------------
Costs and estimated profits in excess of billings on contracts
in progress $ 293,000 $ 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 ("U.S.") 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 one commercial customer. The Company has incurred
research and development costs and earned funding under these agreements as of
December 31, 2001 and December 31, 2000 as follows:
68
2001 2000
------------ -------------
Unfunded research and development $ 11,442,000 $ 8,053,000
Research and development costs 2,838,000 2,909,000
Funding received (1,556,000) (1,328,000)
------------ -------------
$ 12,724,000 $ 9,634,000
============ =============
The Company may incur approximately $700,000 of additional costs on these
efforts. If such costs, as defined, are incurred, the government is obligated to
reimburse the Company $300,000 of such amounts.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of
three months or less at the date of purchase to be cash equivalents. Cash
equivalents consist primarily of overnight commercial paper and are stated at
cost, which approximates market value, 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 (Loss)
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 (loss) is the total of net income (loss) and all other
non-owner changes in equity (or other comprehensive income (loss)) such as
unrealized gains or losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income (loss) 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 (loss), which were not already
in net income (loss) for the years ended December 31, 2001, 2000 and 1999.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (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. The Company's ability to realize its goodwill is
69
dependent upon its ability to raise sufficient financing in order to expand the
rollout and commercialization of its products. In the third quarter of 2001, the
Company was able to secure a limited amount of additional financing to fund its
operations, however, such financing was not in the amount the Company expected
to be able to secure, nor was it enough to rollout commercialization of its
product on a wide scale basis, as had been contemplated by its business plan.
Based on these factors, among others, the Company revised its future business
plan and evaluated the carrying value of the identifiable intangible assets and
goodwill. Based on this evaluation, the Company determined that the assets were
impaired, and, accordingly, during the quarter ended September 30, 2001, the
Company recorded an impairment write-down of its goodwill and other identifiable
intangible assets of approximately $32.1 based on the estimated discounted net
cash flow to be generated over the remaining life of the assets. The impairment
charge is included in the accompanying consolidated statement of operations for
the year ended December 31, 2001. Inclusive of this impairment write-down,
amortization of purchased intangibles expense for the year ended December 31,
2001 was approximately $50.0 million.
As of December 31, 2001 and 2000, goodwill and other intangible assets were
comprised of the following (in millions):
2001 2000
---- ----
Goodwill $ $54.6
Purchased identifiable intangibles 18.0 18.0
Less: Accumulated amortization (16.3) (20.9)
Goodwill and other intangible assets, net $ 1.7 $51.7
===== ====
Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," established 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, 2001 and 2000, the
Company has net deferred tax assets of approximately $47.2 million and $19.8
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 due to the uncertainty as to their
realizability.
At December 31, 2001, the Company has net operating loss carry forwards totaling
approximately $118.2 million, inclusive of the net operating losses acquired as
part of the acquisition of FED, which expire through 2021, available to offset
future Federal taxable income. Pursuant to Section 382 of the Internal
70
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 in consolidation.
Loss per Common Share
In accordance with SFAS No. 128, "Earnings Per Share," 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 amounts 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
for all periods presented 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.
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.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents, contract receivables and costs and
estimate profits in excess of billings on contracts in progress.
The Company maintains cash and cash equivalents with various major financial
institutions. Cash equivalents consist primarily of overnight commercial paper.
The Company limits the amount of credit exposure with any one financial
institution and believes that no significant concentration of credit risk exists
with respect to cash investments.
Contract receivables and costs and estimated profits in excess of billings on
contracts in progress subject the Company to the potential for credit risk with
71
customers, primarily government contractors. The Company establishes its credit
polices based on an ongoing evaluation of its customers' creditworthiness and
competitive market conditions and does not require collateral.
72
Fair Value of Financial Instruments
The Company has various financial instruments, including cash, cash equivalents
and short and long-term debt. The Company believes the carrying values of its
financial instruments approximate their fair values.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current year
presentation.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142
effective January 1, 2002. The Company is currently evaluating the effect that
the adoption of the provisions of SFAS No. 142 will have on its results of
operations and financial position.
In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires obligations associated with the
retirement of long-lived assets to be recorded as increases in costs of the
related asset. Also, on October 3, 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144
develops one accounting model for determining impairment based on the model in
SFAS No. 121, and for long-lived assets that are to be disposed of by sale,
requires them to be disposed of at the lower of book value or fair value less
cost to sell. SFAS No. 144 expands the scope of "discontinued operations." The
new rules will be applied prospectively beginning January 1, 2002. Management
does not expect the adoption of these statements to have a material impact to
its financial statements.
Note 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2001 and 2000:
Useful
Lives 2001 2000
------------- ------------ ------------
Computer equipment and software 3 $ 260,000 $ 230,000
Lab and factory equipment 3 1,551,000 1,230,000
Furniture, fixtures and office equipment 10 154,000 108,000
Leasehold improvements Life of lease 325,000 256,000
------------ ------------
2,290,000 1,824,000
Less- Accumulated depreciation and amortization 1,123,000 556,000
------------ ------------
$ 1,167,000 $ 1,268,000
============ ============
73
Depreciation and amortization expense of equipment and leasehold improvements
for the years ended December 31, 2001 and 2000 was approximately $567,000 and
$580,000, respectively. Depreciation expense for the year ended December 31,
1999 was immaterial to the consolidated financial statements.
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
$225,000 at December 31, 2001.
Note 5 - SHORT-TERM DEBT
On November 27, 2001, the Company entered into a secured convertible note
purchase agreement (the "note agreement") with an investor group (the
"Investors") whereby the Company could issue up to $1.5 million of secured
convertible notes to the Investors, as defined. Concurrent with the note
agreement, the Company issued secured promissory notes to the Investors in the
amount of $875,000 (the "secured notes"). The secured notes accrue interest at
an annual rate of 9.00% per annum and mature on August 30, 2002. The Company is
also required to meet certain debt covenants, as defined. In addition, the
Company granted a total of 359,589 warrants to the Investors in connection with
the secured notes at an exercise price of $1.67 per share. Such warrants are
exercisable through November 2004. The fair value of the warrants in the amount
of approximately $262,000 was recorded as original issue discount, resulting in
a reduction in the carrying value of the debt. The fair value of the warrants
was calculated using the Black-Scholes option pricing model. The original issue
discount was being amortized into interest expense over the life of the debt.
Due to default on the secured notes which occurred on November 30, 2001, as
discussed below, the remaining value of the original issue discount as of the
date of default was amortized into interest expense. Accordingly, the related
interest expense in the amount of $262,000 is included in "Other expense, net"
in the accompanying consolidated statement of operations for the year ended
December 31, 2001.
The secured notes were convertible into common stock at any time at a conversion
price of $1.46 per share. Such conversion terms provided for a beneficial
conversion feature. As the Investors had the option to convert the notes
immediately upon execution of the agreement, the value of the beneficial
conversion feature of approximately $244,000 was recognized immediately as
interest expense and is included in "Other expense, net" in the accompanying
consolidated statement of operations for the year ended December 31, 2001.
On November 30, 2001, the Company was not in compliance with a certain debt
covenant, as defined, and consequently defaulted on the secured notes, causing
the maturity date of the notes to accelerate and become immediately due (the
"default"). The Investors elected not to demand payment immediately. Certain
investors elected to reinvest their respective funds in a subsequent financing
(see Note 10), while certain other investors elected for repayment of their
respective funds. The repayments to those investors occurred subsequent to
year-end. Accordingly, at December 31, 2001, the original liability of the
secured notes of $875,000, plus accrued but unpaid interest, is included in
current liabilities in the accompanying consolidated balance sheet for the year
ended December 31, 2001.
On August 20, 2001, the Company entered into a $1.0 million bridge loan
arrangement with The Travelers Insurance Company ("Travelers"). The loan accrues
interest at an annual rate of 9.25% and matures on May 20, 2002. Additionally,
for each week the loan is outstanding following the closing date of the
arrangement (August 20, 2001), the Company is required to issue $50,000 worth of
warrants to Travelers, as defined. Total warrants issuable to Travelers, per the
74
agreement, are not to exceed an amount such that the exercise of all related
warrants would provide Travelers greater than 19.9% ownership of the outstanding
common stock of the Company. Additionally, if the Company completes the sale of
convertible debt securities for gross proceeds greater than $5 million prior to
May 20, 2002, Travelers has the right to convert the aggregate principal and any
accrued but unpaid interest on the bridge loan into the proportionate amount of
convertible debt securities with similar terms and privileges.
Through December 31, 2001, the Company has issued an aggregate of 416,878
warrants to Travelers at exercise prices ranging from $1.28 to $1.93 per share
in connection with this arrangement. Such warrants are exercisable through
November 2004. Related interest expense of approximately $408,000 has been
recognized in "Other expense, net" in the accompanying consolidated statement of
operations for the year ended December 31, 2001. The expense represents to the
fair value of the warrants on the date of grant calculated using the Black -
Scholes option pricing model. Terms of a subsequent bridge loan arrangement
entered into by the Company and certain private investors (see Note 10) included
a cap on the maximum number of warrants issuable to Travelers under the
Travelers bridge loan arrangement at 451,842 warrants. Travelers agreed to the
aforementioned amendment.
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 8.00% per annum 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
On September 18, 2001 (the "closing date") the Company entered into a $3.0
million convertible debt arrangement with SK Corporation ("SK loan"). The SK
loan accrues interest at an annual rate of 4.00% and matures on September 18,
2004. In connection with the debt arrangement, the Company issued warrants for
the purchase of 205,479 shares of the Company's common stock at an exercise
price of $1.46 per share. Such warrants are exercisable through September 2004.
The fair value of the warrants in the amount of $240,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of the
debt. The fair value of the warrants was calculated using the Black-Scholes
option pricing model. The original issue discount is being amortized into
interest expense over the three-year life of the debt using the effective
interest method. In the event the debt is converted prior to maturity, the
remaining discount will be amortized into interest expense at the conversion
date. For the year ended December 31, 2001, approximately $23,000 has been
amortized into interest expense and is included in "Other expense, net" in the
accompanying consolidated statement of operations for the year ended December
31, 2001.
The SK loan is convertible into common stock at any time at a fixed conversion
price of $1.28 per share. Such conversion terms of the debt provide for a
beneficial conversion feature. Due to the fact that the note holder had the
option to convert the note immediately upon execution of the agreement, the
value of the beneficial conversion feature of approximately $287,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying statement of operations for the year ended December 31,
2001.
Additionally, the terms of the debt arrangement provide for a put option,
exercisable at the option of SK Corporation, to redeem up to 25% of the face
value of the debt each 90-day period beginning on September 19, 2002.
Accordingly, 25% of the face value of the debt and the proportionate share of
75
the original issue discount has been classified as short-term debt and is
included in "Current portion of long-term liabilities" in the accompanying
consolidated balance sheet as of December 31, 2001. The remaining 75% of
principal, original issue discount and accrued interest is classified as other
long-term debt in the accompanying consolidated balance sheet as of December 31,
2001.
The components of long-term debt as of December 31, 2001 and 2000 are as
follows:
2001 2000
------------ --------------
Notes payable (a) $ 168,000 $ 346,000
Capital leases (b) 32,000 40,000
SK Loan 2,798,000 50,000
------------ --------------
2,998,000 436,000
Less- Current portion 693,000 313,000
------------ --------------
$ 2,305,000 $ 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 $71,000 at December 31,
2001 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
$97,007 at December 31, 2001 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 $31,578 at December 31,
2001, excluding interest, due through 2003 at an interest rate of
7.27%.
Maturity of debt for years ending December 31 are as follows:
2002 $ 693,000
2003 51,000
2004 2,455,000
2005- Thereafter -
-----------
Total $ 3,199,000
-----------
Note 7 - SHAREHOLDERS' EQUITY (DEFICIT)
On July 16, 2001, the shareholders approved an increase in the number of
authorized shares of common stock of the Company to 100,000,000 shares with a
par value of $0.001 per share.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. The Company recorded an expense
in the amount of approximately $116,000, the fair value of the shares granted
based on the market value of the stock on the date of grant. The expense is
included in "General and administrative" expense in the accompanying
consolidated statement of operations for the year ended December 31, 2001.
Additionally, the issuance of the shares is reflected in the consolidated
statement of shareholders' equity(deficit) for the year ended December 31, 2001.
76
In connection with the stock agreement, the Company also entered into a supply
agreement with the third-party for future purchases of supplies. (see Note 10)
In June 2001, The Travelers Insurance Company exercised warrants to purchase
16,002 shares of common stock of the Company at an exercise price of $1.72 per
share.
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.
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.
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 a goodwill
impairment charge of approximately $32.1 million and approximately $38.8 million
in amortization expense related to purchased intangible assets for the year
ended December 31, 2001. In accordance with SFAS 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 consolidated statement of operations for
the year ended December 31, 2000.
Note 8 - STOCK-BASED COMPENSATION PLANS
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. On July 16, 2001, the shareholders approved an
increase in the aggregate number of shares of the Company's common stock
reserved for issuance under the 2000 Plan from 3,900,000 to 5,900,000 shares.
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
77
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet the requirements Section 422 of the Code.
In May 2001, the Company's Board of Directors adopted the eMagin Corporation
Employee Stock Purchase Plan (the "Stock Purchase Plan"), under which a total of
750,000 shares of its common stock have been reserved for issuance, subject to
the approval of the shareholders of the Company. The shareholders approved the
Stock Purchase Plan on July 16, 2001. The Purchase Plan, which is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code, provides for consecutive, overlapping 24-month offering periods. Each
offering period contains four six-month purchase periods. Each participant will
be granted an option to purchase the Company's common stock on the first day of
each of the six-month purchase periods and such option will be automatically
exercised on the last day of each such purchase period. The purchase price of
each share of common stock under the Purchase Plan will be equal to 85% of the
lesser of the fair market value per share of common stock on the starting date
of that offering period or on the date of the purchase. Offering periods begin
on the first trading day on or after January 1 and July 1 of each year and
terminate 24-months later. The first offering period, however, began on July 16,
2001 and will end on June 30, 2003.
Employees are eligible to participate in the Stock Purchase Plan if they are
employed by the Company, or a subsidiary of the Company designated by the Board
of Directors, for at least 20 hours per week and for more than five months in
any calendar year. The Stock Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subject to certain limitations. Employees may modify or
end their participation in the offering at any time during the offering period
or on the date of purchase, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Company's Board
of Directors may amend, suspend or terminate the Stock Purchase Plan at any
time, except that certain amendments may be made only with the approval of the
stockholders of eMagin.
Vesting terms of the options range from immediate vesting to a ratable vesting
period of 5-1/2 years. Option activity for the years ended December 31, 2001 and
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
Options granted 1,078,594 1.05
Options exercised -
Options canceled (924,063) 2.17
Outstanding at December 31, 2001 3,544,721 2.41
-----------
Exercisable at December 31, 2001 1,346,301
At December 31, 2001, there were 3,555,279 shares available for grant under the
2000 Plan and the 1994 Plan.
78
Weighted average fair value of options granted in 2001 and 2000 is $0.76 and
$2.72, respectively. 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 rates ranging from 2.75% to
5.41%; no expected dividend yield, expected lives of 2.96 years; and expected
stock price volatility of 128%.
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Number Weighted Number Weighted Average
Outstanding at Weighted Average Average Exercisable at Exercisable Price
Range of Exercise December 31, 2001 Remaining Exercise December 31, 2001
Prices Contractual Life Price
-------------------- ----------------- ---------------- --------------- ----------------- -----------------
$ 0.41 - $1.35 726,196 9.50 0.49 666,196 0.41
1.72 - 1.72 2,174,795 5.97 1.72 483,918 1.72
2.25 - 19.50 643,730 7.95 6.90 196,187 9.85
---------- ---------- ----------
3,544,721 7.05 2.41 1,346,301 2.26
========== ========== ========== ========== ==========
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 the years ended December 31, 2001 and 2000 would have
been increased to the pro forma amounts shown below.
Net
Net loss: 2001 2000
----------------------------------
As reported .................. $ (68,487,000) $ (48,167,000)
Pro forma..................... $ (69,479,000) $ (49,470,000)
Net loss per share:
As reported .................. $ (2.73) $ (2.18)
Pro forma per share...... $ (2.77) $ (2.23)
For the year ended December 31, 1999, pro forma net loss and net loss per share
would have been the same as the reported net loss and net loss per share.
Warrants
At December 31, 2001, 1,747,082 warrants to purchase shares of common stock are
issued, outstanding and exercisable 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. The minimum royalty of $31,500 per year
due under this agreement commences in the first year of the agreement, and
increases to minimum royalty payment of $125,000 per year starting in
79
the sixth year of the agreement. Under this agreement, the Company must pay to
the corporation 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.
For the year ended December 31, 2001, the expense related to the minimum royalty
payment is included in general and administrative expense in the accompanying
consolidated statement of operations.
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. There are no additional payments due
under this agreement.
Supply Agreement
Simultaneous with the issuance of common shares in lieu of cash payment for
services rendered to a third party (Note 7), the Company entered into a
development and supply agreement with the third party.
Operating Leases
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2004. Certain leases provide
for payments of monthly operating expenses. The approximate future minimum lease
payments are as follows:
Year ending December 31:
2002 $ 3,037,000
2003 2,118,000
2004 493,000
-------------
Total $ 5,648,000
=============
Rent expense for the years ended December 31, 2001 and 2000 was approximately
$1,199,000 and $1,213,000, respectively. Rent expense for the year ended
December 31, 1999 was immaterial.
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.
Note 10 - SUBSEQUENT EVENTS (unaudited)
In January 2002, the Company entered into a $1.0 million bridge loan arrangement
with a private investor (the "Investor") in connection with secured note
purchase agreement executed by the Company on November 27, 2001 (Note 5). This
transaction increased the total amount of the secured convertible loan
outstanding under this arrangement to $1,625,000, including amounts previously
made available to the Company in connection with the November 27, 2001 secured
80
note arrangement, net of repayments to certain investors who elected not to
reinvest of $250,000. The secured convertible notes accrue interest at a rate of
9.00% per annum and mature on August 30, 2002. Terms of the notes also include a
fixed conversion rate of $0.5264 per share. The Company also granted warrants to
purchase 921,161 shares of common stock with an exercise price of $0.5468 per
share to the Investor. Such warrants are exercisable through January 2005.
Certain Investors of the November 27, 2001 financing who elected to remain in
the new bridge loan arrangement received resets of the previous conversion rate
and warrant exercise prices to the same terms as the new Investor.
In February 2002, the Company completed a private placement of securities with
several institutional and individual investors of 3,617,128 shares of common
stock at a price per share of $0.6913, generating gross proceeds of
approximately $2.5 million. In connection with the financing arrangement, the
Company issued warrants to purchase 1,446,852 shares of common stock of the
Company at an exercise price of $0.7542 per share. Such warrants are exercisable
through February 2005.
In March 2002, the Company entered into an equity line of credit agreement with
a private equity fund (the "Fund") whereby the Company has the option, but not
the obligation, to sell shares of common stock to the Fund for a three-year
period at a price per share, as defined. The agreement provides for certain
minimum and maximum monthly amounts up to a maximum of $15 million and, in
certain circumstances, up to $20 million.
81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of FED Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit) and cash flows of FED Corporation (a Delaware
corporation in the development stage; see Note 1) and subsidiary for the year
ended December 31, 1999 and for the period from inception (January 6, 1992) to
December 31, 1999 and the consolidated statements of shareholders' equity for
the period from inception (January 6, 1992) to December 31, 1992 and for each of
the seven years 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 results of operations and cash flows for the year
ended December 31, 1999 and for the period from inception (January 6, 1992) to
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
New York, New York Arthur Andersen LLP
February 14, 2000 (except for Note 3,
as to which the date is March 15, 2000)
82
FED CORPORATION (PREDECESSOR)
(a development stage company)
FCONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 15, 2000, THE YEAR ENDED
DECEMBER 31, 1999 AND THE PERIOD FROM INCEPTION (JANUARY 6, 1992)
TO DECEMBER 31, 1999
Period from
Period from inception
January 1, (January 6,
2000 to 1992) to
March 15, December
2000 1999 31, 1999
------------- ------------ ------------
(unaudited)
CONTRACT REVENUES $568,484 $1,895,426 $14,565,353
---------- ---------- ------------
Total revenues 568,484 1,895,426 14,565,353
---------- ---------- ------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$175,000 and $1,148,166, respectively 2,180,519 10,171,387 36,323,800
General and administrative 995,750 5,203,201 15,069,058
Non-cash stock based compensation 7,778,850 -- --
Non-cash charge for induced conversion of -- 1,917,391 1,917,391
debt ----------- ----------- -----------
Total costs and expenses, net 10,955,119 17,291,979 53,310,249
----------- ----------- -----------
OTHER (EXPENSE): (2,968,419) (403,692) (403,102)
Net loss $(13,355,049) $(15,800,245) $(39,147,998)
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
83
FED CORPORATION AND SUBSIDIARY
(a development stage company)
FCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1992
AND FOR EACH OF THE SEVEN YEARS ENDED DECEMBER 31, 1999
Series A Series B Series C Series D Series E
--------------- --------------- --------------- --------------- ---------------
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------------- --------------- --------------- --------------- ---------------
BALANCE, at inception - $- - $- - $- - $- - $-
(January 6, 1992)
Sale of common stock
to founder - - - - - - - - - -
Sale of common stock
to a trust
controlled
by founder - - - - - - - - - -
Net loss for the period - - - - - - - - - -
BALANCE, December 31, 1992 - - - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Sale of common stock
to founder - - - - - - - - - -
Sale of common stock
to founder's family - - - - - - - - - -
Repurchase of common
stock from founder - - - - - - - - - -
Sale of Series A
preferred stock 2,000 20 - - - - - - - -
Dividends on Series A
preferred stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
BALANCE, December 31, 1993 2,000 20 - - - - - - - -
Sale of common stock
to founder - - - - - - - - - -
Sale of Series B
preferred stock - - 10,154 102 - - - - - -
Sales of common stock - - - - - - - - - -
Sales of common stock
to employees - - - - - - - - - -
Sales of common stock
to employees and
ESPP - - - - - - - - - -
Stock purchases
receivable from
employees - - - - - - - - - -
Dividends on Series A
preferred stock - - - - - - - - - -
Net loss for the period - - - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
BALANCE, December 31, 1994 2,000 20 10,154 102 - - - - - -
Sales of common stock,
net of stock
issuance costs - - - - - - - - - -
Common stock issued to
Director as
finder's fee - - - - - - - - - -
Series F Series G
---------- ---------- Accumulated
Preferred Stock Preferred Stock Common Stock Additional During the
--------------- --------------- ------------ Paid-in Development Subscription
Shares Amount Shares Amount Shares Amount Capital Stage Receivables Total
------ ------ ------ ------ ------ ------ -------- ----------- ------------ -----
BALANCE, at inception - $- - $- - $- $- $- $- $-
(January 6, 1992)
Sale of common stock
to founder - - - - 5,000,000 50,000 (45,000) - - 5,000
Sale of common stock
to a trust
controlled
by founder - - - - 161,000 1,610 119,140 - - 120,750
Net loss for the
period - - - - - - - (59,116) - (59,116)
------- ------- ----- ------- ------- ------- ------- --------- ------- ----------
BALANCE, December 31, 1992 - - - - 5,161,000 51,610 74,140 (59,116) - 66,634
Sale of common stock
to founder - - - - 76,000 760 61,490 - - 62,250
Sale of common stock
to founder's family - - - - 13,333 133 19,867 - - 20,000
Repurchase of common
stock from founder - - - - (1,600,000)(16,000) 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 - - - - 3,650,333 36,503 369,877 (471,604) - (65,204)
Sale of common stock
to founder - - - - 100 1 - - - 1
Sale of Series B
preferred stock - - - - - - 40,514 - - 40,616
Sales of common stock - - - - 1,047,132 10,471 1,591,786 - - 1,602,257
Sales of common stock
to employees - - - - 88,469 885 133,110 - - 133,995
Sales of common stock
to employees and
ESPP - - - - 34,041 340 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 - - - - 4,820,075 48,200 2,178,349 (1,894,466) (26,810) 305,395
Sales of common stock,
net of stock
issuance costs - - - - 460,000 4,600 1,107,723 - - 1,112,323
Common stock issued to
Director as
finder's fee - - - - 61,560 616 153,284 - - 153,900
84
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
--------------- --------------- --------------- --------------- ---------------
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
---------- ---------- Accumulated
Preferred Stock Preferred Stock Common Stock Additional During the
--------------- --------------- ------------ Paid-in Development Subscription
Shares Amount Shares Amount Shares Amount Capital Stage Receivables Total
------ ------ ------ ------ ------ ------ -------- ----------- ------------ -----
Sales of common stock
to employees and
ESPP - - - - 33,295 333 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 - - - - 5,374,930 53,749 3,509,776 (5,904,841) - (2,341,194)
Conversion of Series A
preferred stock - - - - - - (1,313) - - -
Common stock issued as
finder's fee - - - - 11,500 115 (115) - - -
Sale of common stock
to employees and
ESPP - - - - 42,447 424 105,249 - - 105,673
Exercise of stock
options - - - - 3,125 31 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 - - - - 5,432,002 54,319 16,578,002 (11,944,708) - 4,718,246
85
FED CORPORATION AND SUBSIDIARY
(a development stage company)
FCONSOLIDATED 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
-------- -------- Accumulated
Preferred Stock Preferred Stock Common Stock Additional During the
--------------- --------------- ------------ Paid-in Development Subscription
Shares Amount Shares Amount Shares Amount Capital Stage Receivables Total
------ ------ ------ ------ ------ ------ -------- ----------- ------------ -----
BALANCE, December
31, 1996 - $ - - $ - 5,432,002 $ 54,319 $16,578,002 $(11,944,708) $ - $4,718,246
Sale of
common stock
to employees
and ESPP - - - - 12,728 128 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 - - - - 5,444,730 54,447 16,623,418 (15,692,276) - 1,016,222
Sale of
common stock
to employees
and ESPP - - - - 8,396 84 38,311 - - 38,395
Exercise of
stock options - - - - 5,000 50 12,450 - - 12,500
Sale of
Series B
preferred
stock - - - - - - 16,638 - - 16,666
Sale of
Series F
preferred
stock 1,915,471 19,155 - - - - 11,473,671 - - 11,492,826
Costs of
private
placement of
preferred
stock 7,300 73 - - - - (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 1,922,771 19,228 - - 5,458,126 54,581 28,029,950 (23,441,703) - 4,692,717
Sale of Series
G preferred stock
and resulting
accretion to
liquidation value - - 681,446 6,814 - - 4,702,817 (957,185) - 3,752,446
86
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
-------- -------- Accumulated
Preferred Stock Preferred Stock Common Stock Additional During the
--------------- --------------- ------------ Paid-in Development Subscription
Shares Amount Shares Amount Shares Amount Capital Stage Receivables Total
------ ------ ------ ------ ------ ------ -------- ----------- ------------ -----
Dividend on
Series A
preferred
stock - - - - - - - (9,000) - (9,000)
Induced
conversion
of preferred
stock and
debt to
common stock (1,922,771) (19,228) (681,446) (6,814) 25,197,315 251,973 12,676,004 (7,030,511) - 5,840,763
Sale of
common stock
to employees
and ESPP - - - - 8,326 83 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) - - - - (26,283,178) (262,831) 262,831 - - -
Net loss for
the period - - - - - - - (15,800,245) - (15,800,245)
-------- -------- -------- ------ ---------- -------- ------- ------ ----------- --- -----------
BALANCE, December
31, 1999 - $ - - $ - 4,380,589 $43,806 $47,254,459 $(47,238,64) $- $59,621
======= ======== ======= ====== ========== ========= =========== ============ === ===========
The accompanying notes are an integral part of these consolidated statements.
87
FED CORPORATION (PREDECESSOR)
(a development stage company)
FCONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 2000 TO
MARCH 15, 2000, THE YEAR ENDED DECEMBER 31, 1999 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, 1992) to
2000 December 31,
(unaudited) 1999 1999
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,355,049) $(15,800,245) $(39,147,998)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 325,095 1,625,081 4,804,920
Deferred rent -- -- -
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 (73,304)
Costs and estimated profits in excess
of billings on contracts in
progress (397,841) 3,069,008 (221,723)
Prepaid expenses and other current
assets (178,058) 129,840 140,779
Deposits and other assets -- 23,871 23,871
Accounts payable, accrued expenses,
and other current liabilities 488,516 131,112 2,110,597
Advance payments on contracts to be
completed --- (246,518) --
----------- ------------ --------------
Net cash used in operating activities (2,456,807) (8,601,205) (30,154,492)
------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (57,574) (250,193) (3,154,640)
Acquisition of business, net of cash
acquired -- -- (547,503)
Proceeds from the sale of assets -- -- 229,550
----------- ----------- -------------
Net cash used in investing activities (57,574) (250,193) (3,472,593)
----------- ----------- -----------
88
Period from Period From
January 1, Inception
2000 to (January 6,
March 15, 1992) to
2000 December 31,
(unaudited) 1999 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 3,419,160
Proceeds from sales of preferred
stock, net of issuance costs -- 3,752,407 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 34,345,553
---------- --------- -----------
Net (decrease) increase in cash and
cash equivalents 585,549 (1,159,818) 718,468
CASH AND CASH EQUIVALENTS, beginning
of period 718,468 1,878,286 --
---------- --------- -----------
CASH AND CASH EQUIVALENTS, end of
period $ 1,304,017 $ 718,468 $ 718,468
========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 11,918 $ 242,000 $ 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 -- $ -- $ --
Net book value assumed -- -- --
Excess purchase price over net assets
acquired -- -- --
Value of preferred stock issued -- -- --
---------- --------- -----------
Net cash paid for acquisition -- $ -- $ --
========== ========= ===========
The accompanying notes are an integral part of these consolidated statements.
89
FED CORPORATION (PREDECESSOR)
(a development stage company)
Notes to the Consolidated Financial Statements
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 $36.6 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.
90
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
--------------
Unfunded research and development $ 8,997,000
Research and development costs 2,322,000
Funding received (1,148,000)
--------------
$ 10,171,000
==============
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, 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
year ended December 31, 1999. Accordingly, the Company's comprehensive income is
the same as its net income for all periods presented.
91
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 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.
92
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 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 acquisition are not
materially different than the accompanying historical statements of operations
presented for the Company.
93
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization expense of equipment and leasehold improvements
for the year ended December 31, 1999 amounted to approximately $810,000.
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 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.
94
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%
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.
95
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.
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.
96
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
----------------
Net loss as reported $ (15,800,000)
Net loss pro forma (16,656,000)
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 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 year ended
December 31, 1999 is summarized as follows (all amounts have been restated to
reflect the Company's 1 for 7 reverse stock split (Note 8)):
97
1999
----------------------------
Weighted Average
Shares Exercise Price
----------------------------
Outstanding at beginning of year 288,875 $ 18.13
Options granted 155,666 21.00
Options exercised - -
Options forfeited (22,718) 22.43
Options canceled (46,521) 21.68
-------
Outstanding at end of year 375,302 18.59
-------
Exercisable at end of year 283,389
=======
Weighted average fair value of
options granted $ 14.84
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 range
from $5.20 - $38.00.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------------
Number Weighted Average Weighted Number Weighted Average
Range of Exercise Outstanding at Remaining Average Exercisable at Exercisable
Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 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
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
98
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.
In 1999, the Company terminated this license agreement.
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.
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 for the year ended December 31, 1999 was charged to research and
development expense under various phases of these agreements. Based on the
remaining phases of the current agreements, the Company will be required to make
additional payments of $250,000 in 2001, if the remaining phases of the
agreements are achieved.
Operating Leases
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through January 2004. Certain leases
provide for payments of monthly operating expenses. The approximate future
minimum lease payments are as follows:
Year ending December 31:
2000 $2,879,000
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.
99
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.
Our executive officers and directors, and their ages and positions are:
Name Age Position
---- --- --------
Gary W. Jones (1).............................. 46 Chairman, Chief Executive Officer, President
K. C. Park..................................... 65 President, Virtual Vision, Inc.
Edward V. Flynn................................ 57 Chief Financial Officer, Treasurer
Susan K. Jones................................. 50 Chief Marketing and Strategy Officer, Secretary
Webster E. Howard.............................. 66 Chief Technology Officer
Claude Charles (2) ............................ 63 Director
Ajmal Khan (1,2)............................... 38 Director
Jack Rivkin (1) (2) (3)........................ 61 Director
Gary W. Jones has served as our Chairman, Chief Executive Officer, and
President since 1992. Mr. Jones has over 25 years of experience in both public
and private companies in the areas of business development, high volume
manufacturing, product development, research, and marketing. Previously, Mr.
Jones managed both semiconductor manufacturing and research and development
programs at Texas Instruments. Mr. Jones is a director, a member of the
Executive Committee of the Board, and Chairman of the Technology Committee of
the United States Display Consortium. Mr. Jones received a B.S. in electrical
engineering and physics from Purdue University.
Dr. K.C. Park was named President of our wholly owned subsidiary, Virtual
Vision, Inc., in January 2002 after serving as our Executive Vice President of
International Operations since June 1998. During his twenty-seven year tenure
with IBM he managed flat panel display and semiconductor programs at the IBM
Watson Research Center, directed the corporate display programs at the IBM
Corporate Headquarters, and established Technical Operations in IBM Korea and
served as Senior Managing Director. Dr. Park joined LG Electronics in 1993 as
Executive Vice President and initiated and led corporate-wide efforts to shift
the major emphasis of the corporation into multimedia. Immediately prior to
joining eMagin, Dr. Park served as Executive Vice President of Reveo Inc. Dr.
Park holds a B.S. from the University of Minnesota, an M.S. from MIT, and a
Ph.D. in Solid State Chemistry from the University of Minnesota and an MBA from
New York University.
Edward V. Flynn, Chief Financial Officer and Treasurer, joined eMagin in
February 1994 as Vice President of Finance and Controller. Previously, Mr. Flynn
was employed by the IBM Corporation for over 29 years in senior financial and
consulting positions where he held responsibilities for both domestic and
100
international financial management with assignments in treasury, accounting,
financial planning, pricing, financial system development, and management
reporting and analysis. He consolidated the financial results of IBM's operating
results in Europe and provided accounting, reporting and functional guidance to
over 70 locations in Europe, Africa and the Middle East. Mr. Flynn received his
accounting degree from St. John's University and MBA in financial management
from Iona College.
Susan K. Jones has served as Executive Vice President and Secretary since
1992, and assumed responsibility of Chief Marketing and Strategy Officer in
2001. Ms. Jones has 25 years of industrial experience, including senior
research, management, and marketing assignments at Texas Instruments and Merck,
Sharp, & Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs
committees for industry organizations including IEEE, SPIE, and SID. Ms. Jones
served as a director of FED Corporation from 1993 to 2000. Ms. Jones graduated
from Lamar University with a B.S. in chemistry and biology, holds more than a
dozen patents, and has authored more than 100 papers and talks.
Dr. Webster E. Howard was named Chief Technology Officer in 2001, after
serving as Vice President, of Technology Development since 1996. He joined IBM
in 1961 and, since 1973, he has focused on display technology, managing projects
in plasma displays, thin film electroluminescence, CRTs, and thin film
transistor/liquid crystal displays. The latter project led to the formation of
DTI, the joint venture between IBM and Toshiba. In 1993, he joined AT&T as a
director in the High-Resolution Technologies division of AT&T Global
Manufacturing and Engineering. Dr. Howard is a Fellow of the American Physical
Society, the IEEE, and the Society for Information Display, as well as being a
member of Sigma Xi. He is past-president of the Society for Information Display
and is a former member of the IBM Academy of Technology. He has authored 55
papers and presentations. Dr. Howard received his BS from Carnegie-Mellon
University and his A.M. and Ph.D. from Harvard University, all in Physics.
Directors
Claude Charles has served as a director since April of 2000. Mr. Charles
has served as President of Great Tangley Corporation since 1999. From 1996 to
1998 Mr. Charles was Chairman of Equinox Group Holdings in Singapore. Mr.
Charles has also served as a director and in senior executive positions at SG
Warburg and Co. Ltd., Peregrine Investment Holdings, Trident International
Finance Ltd., and Dow Banking Corporation. Mr. Charles holds a B.S. in economics
from the Wharton School at the University of Pennsylvania and a M.S. in
international finance from Columbia University.
Ajmal Khan has served as a director since March of 2000. Mr. Khan is
President and CEO of Verus International Group Limited, an investment firm, and
has served as its President and Chief Executive Officer since its inception in
1998. Mr. Khan serves on the board of directors of Wattage Monitor Inc.,
PredictIt Inc., and iParty Corp.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is the
former Executive Vice President of Citigroup Investments Inc., and a director of
Greenwich Street Capital Partners. He previously served as Vice Chairman and a
director of Smith Barney. Mr. Rivkin's prior industry experience includes
101
positions at Procter and Gamble, Mitchell Hutchins, Paine Webber and Lehman
Brothers. Mr. Rivkin serves on the board of directors of On2.com and Enherent
Corporation Group. Mr. Rivkin holds an engineering degree in metallurgy from the
Colorado School of Mines and an MBA from Harvard University.
Information concerning Gary W. Jones, also a Director of the Company and
the Chairman of our Board, is provided above with his officer profile.
102
General Information Concerning the Board of Directors
The Board of Directors of eMagin is classified into three classes: Class A,
Class B and Class C. Each Class A director will hold office until the 2002
Annual Meeting of our stockholders. Currently, Mr. Gary Jones and Mr. Jack
Rivkin are the Class A directors. Each Class B director will hold office until
the 2003 Annual Meeting of our stockholders. Currently, Mr. Ajmal Kahn is the
sole Class B director. Class C directors will hold office until the 2004 Annual
Meeting of our stockholders. Currently, Mr. Claude Charles is the sole Class C
director. In each case, each director will hold office until his successor is
duly elected or appointed and qualified in the manner provided in eMagin's
Amended and Restated Certificate of Incorporation and our Amended and Restated
Bylaws, or as otherwise provided by applicable law.
The Board of Directors held fourteen meetings during 2001. Each incumbent
director attended at least 75% of the aggregate of all meetings of the Board of
Directors during the period for which he was a director and the meetings of the
committees on which he or she served. The Board of Directors has established an
Executive Committee, an Audit Committee and a Compensation Committee.
103
During 2001, the Company's directors received compensation for service to
the Company as director. (See "Executive Compensation - Compensation of
Directors".) Directors also received reimbursement of ordinary expenses incurred
in connection with attendance at such meetings.
Due to other time commitments, Messrs. Reddy and Solomon resigned as
directors of the Company in December 2001. There were no disagreements with
management policy or procedures relating to such resignations.
Executive Officers of the Company
Officers are appointed to serve at the discretion of the Board of
Directors. Except for Mr. Gary Jones, who is the spouse of Ms. Susan Jones, the
Company's Executive Vice President and Secretary, none of the executive officers
or directors of the Company has a family relationship with any other executive
officer or director of the Company.
Committees of the Board of Directors
The Audit Committee is responsible for (i) determining the adequacy of the
Company's internal accounting and financial controls, (ii) reviewing the results
of the audit of the Company performed by the independent public accountants, and
(iii) recommending the selection of independent public accountants. Messrs.
Charles and Rivkin and Mr. Solomon, prior to his resignation from the Board in
December 2001, were members of the Audit Committee during fiscal 2001. The Audit
Committee met 4 times during fiscal 2001.
The Compensation Committee determines matters pertaining to the
compensation of certain executive officers of the Company and administers the
Company's stock option, incentive compensation, and employee stock purchase
plans. Messrs. Rivkin and Reddy, prior to his resignation from the Board in
December 2001, were members of the Compensation Committee during fiscal 2001 and
met once during fiscal 2001.
The Executive Committee has authority to act for the Board on most matters
during intervals between Board meetings, subject to Board approval. Messrs.
Jones, Khan, and Rivkin were members of the Executive Committee during fiscal
2001. The Executive Committee met 2 times during the fiscal 2001.
104
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's review of copies of all disclosure reports filed by
directors and executive officers of the Company pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, the Company believes that there was
compliance with all filing requirements of Section 16(a) applicable to directors
and executive officers of the Company during fiscal 2001.
105
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for services in all
capacities to the Company or its subsidiary for the last three fiscal years of
those persons who at December 31, 2001, were (i) the chief executive officer of
the Company and (ii) the other four most highly compensated executive officers
of the Company (collectively, the "named executive officers"). Prior to
establishment of the Compensation Committee, the Chief Executive Officer and
Board elected not to pay bonuses as part of executive compensation during the
early development stage years of the Company. The Compensation Committee plans
to allocate a bonus in stock options for the fiscal year 2001 during 2002.
Summary Compensation Table
Long-Term
Compensation
Awards
(Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus(1) Compensation Options)
--------------------------- ---- ------ ----- ------------ --------
Gary Jones...................... 2001 234,393 (1) - -
Chief Executive Officer 2000 227,863 - - -
1999 188,377 - - -
Andrew P. Savadelis............... 2001 255,769 112,500(2) - -
Former Executive Vice 2000 91,667(2) 37,500(2) - -
President and Chief
Financial Officer
Susan K. Jones.................. 2001 189,207 (1) - -
Executive Vice President 2000 183,837 - - -
Chief Strategy Officer 1999 153,224 - - -
K.C. Park........................ 2001 171,877 - - -
President, Virtual Vision 2000 168,623 - - -
1999 141,010 - - -
Webster E. Howard................ 2001 173,923 - - -
Chief Technology Officer 2000 171,046 - - -
1999 144,668 - - -
Edward V. Flynn.................. 2001 133,000 - - -
Chief Financial Officer, 2000 129,893 - - -
Treasurer 1999 108,610 - - -
(1) The Compensation Committee has allocated a bonus of 750,000 stock options
to Gary W. Jones and 350,000 stock options to Susan K. Jones for the year
2001 during 2002.
(2) Mr. Savadelis was employed for less than a full year in 2000. As such, his
salary amount for that year represents salary earned from his start date
through the end of the fiscal year. Mr. Savadelis' compensation included an
annual salary of $250,000 and a non-milestone-driven bonus of $150,000 to
be paid quarterly in the period from September 11, 2000 to September 10,
2001. $37,500 of the non-milestone-driven bonus was paid to Mr. Savadelis
during 2000. In addition, the Company paid relocation assistance in the
amount of $50,000 in October, 2000. Mr. Savadelis ceased to be employed by
the Company in January 2002.
106
Stock Options and Certain Other Compensation
The following table presents the stock options granted to the named
executive officers in fiscal 2001 under the Company's 2000 Stock Option Plan:
Option Grants in Last Fiscal Year
Percent of Value at Assumed
Number of Total Options Annual Rates of Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term
Options in Fiscal Price per Expiration ---------------------------
Name Granted Year Share (3) Date 5% 10%
---- ---------- ------------- --------- ---------- ------ -------
Gary W. Jones(2) 147,183 15.4% $0.41 12/04/11 $17,099 $38,941
A. P. Savadelis(2) 176,056 18.4% $0.41 12/04/11 20,454 46,580
Webster Howard(1) 60,000 6.3% $1.35 10/18/06 22,952 52,270
Edward V. Flynn(2) 7,042 0.7% $0.41 12/04/11 818 1,863
Webster Howard(2) 63,380 6.6% $0.41 12/04/11 7,363 16,769
K.C. Park(2) 60,563 6.3% $0.41 12/04/11 7,036 16,024
(1) Mr. Howard was awarded an additional grant of options during fiscal year
2001 due to his appointment during such year to Chief Technology Officer of
the Company. Options vested immediately.
(2) Options issued to compensate employees for deferral of a portion of their
salary. Options vested immediately.
(3) The exercise price of the stock options was based on the fair market value
of the stock on the date of grant.
107
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The table below presents certain information concerning the exercises of
stock options during the fiscal year ended December 31, 2001 by each of the
named executive officers and the number of shares subject to both exercisable
and unexerciseable stock options as of December 31, 2001. The common stock price
at December 31, 2001 was $0.42 per share.
Value of
# of Securities Unerercised
Underlying In-the-money
Shares Unexercised Options at
Acquired Value Options at FY-End FY-End
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- ----------------- -------------- ------------- -------------
Gary Jones-------------- - - 147,183 - $1,472 $ -
A. P. Savadelis--------- - - 176,056 - 1,761 -
Susan K. Jones---------- - - - - - -
Webster Howard---------- - - 63,380 - 634 -
K.C. Park--------------- - - 60,563 - 606 -
Edward V. Flynn--------- - - 7,042 - 70 -
Compensation of Directors
Non-management Directors receive options under the 2000 Stock Option Plan
(the "2000 Plan"). Under the 2000 Plan, a grant of options to purchase 40,000
shares of Common Stock will automatically be granted on the date a Director is
first elected to the Board with an exercise price per share equal to 100% of the
market value of one share on the date of grant. Each option so granted will
expire ten years after the date of grant and will become exercisable in four
equal installments commencing on the date of grant and annually thereafter.
Non-management Directors receive an annual grant of options to purchase 10,000
shares of Common Stock at the fair market value as determined on the date of
grant, which options so granted will expire ten years after the date of grant
and will become exercisable in two equal installments commencing one year
following the date of the grant and annually thereafter. In addition, at the
beginning of 2002, each non-management Director received a grant of an
additional 100,000 options with an exercise price per share equal to 100% of the
market value of one share on the date of grant. Each option so granted vested
immediately and will expire five years after the date of grant. Each
non-management Director is also reimbursed for ordinary expenses incurred in
connection with attendance at Board meetings.
108
Executive Employment Agreements
In connection with our merger with FED Corporation, effective March 16,
2000, we entered into employment agreements for a two-year term with Gary Jones
and Susan Jones which provide for annual base salaries of $229,500 and $185,000
respectively and an annual discretionary bonus, as determined by our
compensation committee, based on operating milestones and public market
valuations. These employment agreements expired on March 16, 2002. The
employment agreements of the above executive officers included agreements not to
compete with us during their term of employment with us and for a period of one
year following the qualified termination of their employment.
The Compensation Committee has allocated a bonus of 750,000 stock options
to Gary W. Jones and 350,000 stock options to Susan K. Jones for the year 2001
during 2002 based on achievement of first product sales and achievement of
certain military program awards.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during fiscal 2001 were Mr.
Rivkin and, prior to Mr. Reddy's resignation in December 2001, Mr. Reddy.
Neither of Mr. Reddy nor Mr. Rivkin has ever been an officer or employee of the
Company. None of the executive officers of the Company served as a member of the
compensation committee of another entity during 2001.
Compensation Committee Report
The Compensation Committee establishes and reviews the compensation of the
Company's executive officers. The Compensation Committee of the Board of
Directors consists entirely of non-employee directors.
Compensation Philosophy. The Company's executive compensation program is
designed to attract and retain key executives who will enhance the performance
of the Company, promote its long-term interest and build stockholders' equity.
The Compensation Committee sought to align total compensation for executive
management with corporate performance. The Company's executive compensation
package generally includes four main components:
1. A base salary which is established at levels considered appropriate for the
duties and scope of responsibilities of each officer's position.
2. A bonus potential which is tied directly to operating objectives.
3. A stock option award to increase stock ownership in the Company and align
executive compensation with stockholder interests.
4. Other compensation and employee benefits generally available to all
employees of the Company, such as health insurance and participation in the
eMagin Employee Savings and Protection Plan ("401(k) Plan").
109
The Compensation Committee places a particular emphasis on variable,
performance based components, such as the bonus potential and stock option
awards, the value of which could increase or decrease to reflect changes in
corporate and individual performances.
CEO Compensation. Mr. Jones's base salary in 2001 was $229,500. On December
4, 2001 the Company temporarily deferred management salaries in excess of
$125,000 pending closing of additional financing. In January 2002 the
Compensation Committee allocated a bonus of 750,000 stock options to Gary W.
Jones for the year 2001 based on achievement of first product sales, achievement
of certain military program awards, and other milestones. No cash bonus was paid
to Mr. Jones or any officer during 2001.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code disallows a tax deduction to publicly held companies for
compensation paid to certain of their executive officers to the extent that such
compensation exceeds $1.0 million per covered officer in any fiscal year. The
limitation applies only to compensation that is not qualified performance-based
compensation under the Internal Revenue Code. Non-performance-based compensation
paid to the Company's executive officers for the 1999 Fiscal Year did not exceed
the $1.0 million limit per officer, and the Compensation Committee plans to keep
the non-performance-based compensation to be paid to the Company's executive
officers for the 2000 Fiscal Year within that limit.
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the interests of each executive officer and the interests of
the Company's shareholders through the use of competitive and equitable
executive compensation in a balanced and reasonable manner, for both the short
and long term.
Compensation Committee:
Jack Rivkin
Performance Graph
The following graph compares the cumulative total shareholder return on our
Common Stock from the initial listing date of our Common Stock on the American
Stock Exchange through December 30, 2001 to the Russell 2000 Index and an index
of peer companies selected by the Company ("Peer Index"). The companies in the
Peer Index are as follows: Kopin Corporation, Microvision Corporation, Three
Five Systems, Inc., and Universal Display Corporation. The past performance of
the Company's Common Stock is not an indication of future performance. We cannot
assure you that the price of the Company's Common Stock will appreciate at any
particular rate or at all in future years. Notwithstanding any statement to the
110
contrary in any of the Company's previous or future filings with the Securities
and Exchange Commission, the graph shall not be incorporated by reference into
any such filings.
[Graphic of Performance Graph]
The above performance graph is based upon the following data:
03/17/00 12/29/00 12/28/01
-------- -------- --------
EMagin $100.00 $9.24 $1.83
-----------------------------------------------------------------
Russell 2000 $100.00 $87.34 $89.53
-----------------------------------------------------------------
Peer Index $100.00 $38.05 $14.42
-----------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of our common stock
beneficially owned by (i) each member of our board of directors; (ii) certain of
our executive officers (including all of our named executive officers); (iii)
all of our directors and executive officers as a group; and (iv) all those known
by us to be beneficial owners of more than five percent of the outstanding
shares of our common stock as of April 1, 2002. Unless otherwise indicated, the
shareholders listed in the table have sole voting and investment power with
respect to the shares indicated.
PRINCIPAL STOCKHOLDERS
Shares of Common Stock Beneficially
Owned
-------------------------------------------
Shares Percent
Travelers Insurance
Company (1)................................... 8,535,007 26.5%
Mortimer D.A. Sackler (2)..................... 4,898,323 14.3%
Gary W. Jones (3)............................. 2,519,231 7.9%
Susan K. Jones (3)............................ 2,519,231 7.9%
SK Corporation (4)............................ 2,549,229 7.8%
Dr. Mortimer D. Sackler(5).................... 2,162,761 6.9%
ROHM Corporation(6)........................... 1,794,871 5.8%
Farmers Group (7)............................. 1,531,628 5.0%
Ajmal Khan (8)................................ 621,135 *
Claude Charles (9)............................ 140,000 *
111
Shares of Common Stock Beneficially
Owned
-------------------------------------------
Shares Percent
K. C. Park (10)............................... 167,603 *
J. Rivkin (11)................................ 519,939 *
W. Howard (12)................................ 325,204 *
Edward V. Flynn (13).......................... 309,636 *
All Directors and Executive Officers as a
Group (14)................................. 13,137,755 37.2%
---------------------
* Less than 1% of the outstanding common stock.
(1) Shares are owned by Travelers and its affiliates TRAL and Citicorp. This
figure includes warrants held by Travelers and Citicorp to purchase 614,613
and 127,292 shares of common stock respectively, 40,000 options of which
10,000 are exercisable within 60 days of April 1, 2002 and convertible debt
to purchase 1,188,396 shares of common stock at a value date of March 28,
2002. (Address of beneficial owner is Citigroup Inc. 399 Park Avenue, New
York, NY 10043.)
(2) Includes warrants and convertible debt to purchase 1,367,781 and 2,279,635
shares of common stock respectively. This figure also includes 961,597
shares of common stock and warrants to purchase 289,310 shares of common
stock held by Rainbow Gate Corporation. Mr. Mortimer D.A. Sackler is the
investment manager of Rainbow Gate Corporation and disclaims beneficial
ownership of the shares held by Rainbow Gate Corporation except to the
extent of his pecuniary interest in Rainbow Gate Corporation. (Address of
beneficial owner is c/o Chadbourne & Parke LLP, 30 Rockefeller Plaza, New
York, New York 10112.)
(3) This figure represents shares owned by Gary Jones and Susan Jones who are
married to each other, including 1,408,655 shares of common stock issuable
upon exercise of stock options and warrants to purchase 59,716 shares of
common stock, which options and warrants are exercisable within 60 days of
April 1, 2002.
(4) Includes warrants and convertible debt to purchase 205,479 and 2,343,750
shares of common stock respectively. (Address of beneficial owner is SK
Corporation, 99 Seorin-dong, Jongro-ku, Seoul, 110-110, Korea.)
(5) Includes warrants and convertible debt to purchase 341,945 and 569,945
shares of common stock respectively. This figure also includes 961,597
shares of common stock and warrants to purchase 289,310 shares of common
stock held by Rainbow Gate Corporation. Dr. Mortimer D. Sackler is the sole
shareholder of Rainbow Gate Corporation. (Address of beneficial owner is
c/o Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York
10112.)
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(6) Includes warrants to purchase 512,820 shares of common stock. (Address of
beneficial owner is ROHM Corporation, 21 Saiin Mizosaki-cho, kyo-Ku Kyoto,
615-8585, Japan.)
(7) Includes 724,618 shares of common stock owned by Farmers Insurance Exchange
and 724,618 shares owned by Mid-Century Insurance, and warrants to purchase
a total of 82,352 shares of common stock, one-half of which warrants are
held by Farmers Insurance Exchange and one-half of which are held by
Mid-Century Insurance. (Address of beneficial owner is 4 New York Plaza,
New York, N.Y. 10004.)
(8) Includes 481,135 shares held by Verus International Ltd., in which Mr. Kahn
is Chief Executive Officer and a stockholder. Also includes 140,000 shares
of common stock issuable upon exercise of stock options of which 110,000
are exercisable within 60 days of April 1, 2002.
(9) Includes 140,000 shares of common stock issuable upon exercise of stock
options of which 110,000 are exercisable within 60 days of April 1, 2002.
(10) Includes 167,431 shares of common stock issuable upon exercise of stock
options of which 141,009 are exercisable within 60 days of April 1, 2002.
(11) Includes options, warrants and convertible debt to purchase 140,000,
142,477 and 237,462 shares of common stock respectively. All 140,000
options to purchase shares of common stock are exercisable within 60 days
of April 1, 2002. Mr. Rivkin is the Non-Executive Chairman of Verus
International Ltd.
(12) Includes 325,204 shares of common stock issuable upon exercise of stock
options of which 211,230 are exercisable within 60 days of April 1, 2002.
(13) Includes 309,636 shares of common stock issuable upon exercise of stock
options of which 249,571 are exercisable within 60 days of April 1, 2002.
(14) Includes 2,670,676 shares of common stock issuable upon exercise of stock
options of which 2,380,465 are exercisable within 60 days of April 1, 2002.
Also includes warrants to purchase 985,194 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into a consulting agreement dated as of March 16, 2000 with
Verus International Ltd., of which Mr. Ajmal Khan is Chief Executive Officer and
Mr. Rivkin is the Non-Executive Chairman. Mr. Khan and Mr. Rivkin are also
members of our Board of Directors. Terms of the agreement include monthly
payments of $15,000 by us to Verus International Ltd. for consulting services
rendered during 2001. The term of the agreement expired on March 16, 2002.
On November 27, 2001, eMagin Corporation entered into a Secured Note
Purchase Agreement whereby five accredited initial investors agreed to lend us
an aggregate of $875,000 in exchange for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 shares of our
common stock. Messrs. Rivkin and Solomon, who at the time of the
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transaction were each members of our Board of Directors, participated as
investors in the transaction and each invested $125,000 in the Company. In
return for such investment, Messrs. Rivkin and Solomon collectively received (i)
Secured Convertible Promissory Notes in an aggregate principal amount of
$250,000, and (ii) warrants exercisable for 102,740 of our common shares.
Soveriegn Bancorp Ltd. also invested $100,000 under the transaction and received
(i) a Secured Convertible Promissory Note in an aggregate principal amount of
$100,000, and (ii) warrants exercisable for 41,096 of our common shares. The
brother of Mr. Khan, a director of the Company, is an officer of Soveriegn
Bancorp Ltd. In addition, Mr. Mortimer D.A. Sackler, who is currently a
beneficial owner of more than five percent of the outstanding shares of our
common stock, invested $200,000 under the transaction and collectively received
(i) Secured Convertible Promissory Notes in an aggregate principal amount of
$200,000, and (ii) warrants exercisable for 82,192 of our common shares. As of
January 14, 2002, the Secured Note Purchase Agreement was amended to increase
(i) the aggregate principal amount of the Secured Convertible Promissory Notes
issued thereunder to $1,625,000, and (ii) the number of shares issuable pursuant
to the warrants issued thereunder to 1,954,944. Pursuant to these amendments,
Mr. Mortimer D.A. Sackler invested an additional $1,000,000 under the Secured
Note Purchase Agreement and received (i) additional Secured Convertible
Promissory Notes with an aggregate principal amount of $1,000,000, and (ii)
additional warrants exercisable for 1,285,589 shares of our common stock.
Rainbow Gate Corporation, pursuant to the November 27, 2001 transaction and the
January 14, 2002 amendment, invested $300,000 under the transaction and
collectively received (i) Secured Convertible Promissory Notes in an aggregate
principal amount of $300,000, and (ii) warrants exercisable for 341,945 of our
common shares. After the close of the January 14, 2002 amended transaction, Dr.
Mortimer D. Sackler purchased from Rainbow Gate Corporation the Secured
Convertible Promissory Notes in an aggregate principal amount of $300,000, and
(ii) warrants exercisable for 341,945 of our common shares. At the time of the
amendment, the Company also redeemed $250,000 in aggregate principal amount of
the then outstanding notes held by three of the initial investors under the
agreement. Pursuant to this redemption, the notes held by Mr. Solomon, (who at
the time of the redemption was no longer a member of our Board of Directors) and
by Soveriegn Bancorp Ltd. were redeemed.
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of our common stock (subject to
certain customary anti-dilution adjustments). Rainbow Gate Corporation invested
$500,000 in the Company under the agreement and received pursuant to such
investment (i) 723,275 shares of our common stock, and (ii) warrants exercisable
for 289,310 shares of our common stock.
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. All
transactions were negotiated at arm's length.
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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, 2001 and 2000
115
- Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999 and for the period from
inception (January 23, 1996) to December 31, 2001.
- Consolidated Statements of Shareholders' Equity for the period
from inception (January 23, 1996) to December 31, 1996 and each
of the five years ended December 31, 2001
- Consolidated Statements of Cash Flows--Years ended December 31,
2001, 2000, and 1999 and for the period from inception (January
23, 1996) through December 31, 2001
- Notes to Consolidated Financial Statements
(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.
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 herein by reference.
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, as filed in the Registrant's
Form 10-K/A for the year ended December 31, 2000 incorporated by
reference herein.
116
10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000, as
filed in the Registrant's Form for the year ended December 31, 2000
incorporated by reference herein.
10.4 Employment Agreement with Susan K. Jones, dated March 16, 2000, as
filed in the Registrant's Form 10-K/A for the year ended December 31,
2000 incorporated by reference herein.
10.5 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, as filed in
the Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
10.6 Amendment Number 1 to the Nonexclusive Field of Use License Agreement
relating to the OLED Technology for miniature, high resolution
displays between the Eastman Kodak Company and FED Corporation dated
March 16, 2000, as filed in the Registrant's Form 10-K/A for the year
ended December 31, 2000 incorporated by reference herein.
10.7 Amendment Number 1 to the Lease between International business
Machines Corporation and FED Corporation dated July 9, 1999, as filed
in the Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
10.8 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999, as filed in the Registrant's Form
10-K/A for the year ended December 31, 2000 incorporated by reference
herein.
10.9 Amendment Number 2 to the Lease between International Business
Machines Corporation and FED Corporation dated January 29, 2001, as
filed in the Registrant's Form 10-K/A for the year ended December 31,
2000 incorporated by reference herein.
10.10 Virtual Vision lease between Redson Building Partnership and Vision
Newco dated December 15, 1995, as filed in the Registrant's Form
10-K/A for the year ended December 31, 2000 incorporated by reference
herein.
10.11 Securities Purchase Agreement dated as of September 18, 2001 by and
between eMagin Corporation and SK Corporation, as filed in the
Registrant's Form 8-K dated September 26, 2001 incorporated herein by
reference.
10.12 Registration Rights Agreement dated as of September 19, 2001 by and
between eMagin Corporation and SK Corporation, as filed in the
Registrant's Form 8-K dated September 26, 2001 incorporated herein by
reference.
117
10.13 Note Purchase Agreement entered into as of August 20, 2001, by and
among eMagin Corporation and The Travelers Insurance Company, as filed
in the Registrant's Form 8-K dated September 4, 2001 incorporated
herein by reference.
10.14 Secured Note Purchase Agreement entered into as of November 27, 2001,
by and among eMagin Corporation and certain investors named therein,
as filed in the Registrant's Form 8-K dated December 18, 2001
incorporated herein by reference.
10.15 Registration Rights Agreement dated November 27, 2001 by and between
eMagin Corporation and certain investors named therein, as filed in
the Registrant's Form 8-K dated December 18, 2001 incorporated herein
by reference.
10.16 Security Agreement dated as of November 20, 2001, by and between
eMagin Corporation, Verus International Ltd. and certain investors
named therein, as filed in the Registrant's Form 8-K dated December
18, 2001 incorporated herein by reference.
21.1 Subsidiaries of the Registrant as filed in the Registrant's Form 10-K
dated April 1, 2002 incorporated herein by reference.
23.1 Consent of Arthur Andersen LLP as filed in the Registrant's Form 10-K
dated April 1, 2002 incorporated herein by reference.
99.1 Letter to commission pursuant to Temporary Note 3T as filed in the
Registrant's Form 10-K dated April 1, 2002 incorporated herein by
reference.
118
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
April 2002.
EMAGIN CORPORATION
By: /s/ Gary Jones
--------------------------------------
Name: Gary Jones
Title: 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 Director April 30, 2002
--------------------------- (Principal Executive Officer)
Gary Jones
/s/ Edward V. Flynn Chief Financial Officer, Treasurer (Principal April 30, 2002
--------------------------- Financial Accounting Officer)
Edward V. Flynn
/s/ Claude Charles Director April 30, 2002
---------------------------
Claude Charles
/s/ Ajmal Khan Director April 30, 2002
---------------------------
Ajmal Khan
/s/ Jack Rivkin Director April 30, 2002
--------------------------
Jack Rivkin
119