-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+ssa2QyvTt877H1LHBNvUq2jXKMPDMMzoW0osTilT1dvQQFvycfO1B3DnB07zYu T3n4G0KcXoeleR1rvW490Q== 0001125282-01-500137.txt : 20010501 0001125282-01-500137.hdr.sgml : 20010501 ACCESSION NUMBER: 0001125282-01-500137 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMAGIN CORP CENTRAL INDEX KEY: 0001046995 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 880378451 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-15751 FILM NUMBER: 1616978 BUSINESS ADDRESS: STREET 1: 1580 ROUTE 52 STREET 2: SUITE 2000 V6E 2K3 CITY: HOPEWELL JUNCTION STATE: NY ZIP: 12533 BUSINESS PHONE: 9148921900 MAIL ADDRESS: STREET 1: 1580 ROUTE 52 STREET 2: SUITE 2000 V6E 2K3 CITY: HOPEWELL JUNCITON STATE: NY ZIP: 12533 FORMER COMPANY: FORMER CONFORMED NAME: FASHION DYNAMICS CORP DATE OF NAME CHANGE: 19980805 10-K/A 1 b311197_10ka.txt ANNUAL REPORT 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, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ Commission File Number 1-12031 ------------------------ EMAGIN CORPORATION ------------------ (Exact name of registrant as specified in its charter) Nevada 88-0378451 (State or other jurisdiction of (I.R.S. Employer 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 $0.01 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, 2001, was approximately $72.7 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 25,069,143 shares of Common Stock. PRELIMINARY NOTE: This Form 10-K/A is being filed to report Part III information in lieu of the incorporation of such information by reference to the Company's definitive proxy material for its 2001 Annual Meeting of Shareholders. -2- FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 INDEX PART I Item 1: Description of Business Item 2: Description of Property Item 3: Legal Proceedings Item 4: Submission of Matters to a Vote of Security Holders PART II Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters Item 6: Selected Financial Data Item 7: Management's Discussion and Analysis of Financial Conditions and Results of Operations Item 7A: Quantitative and Qualitative Disclosures About Market Risk Item 8: Financial Statements Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10: Directors and Executive Officers of the Registrant Item 11: Executive Compensation Item 12: Security Ownership of Certain Beneficial Owners and Management Item 13: Certain Relationships and Related Transactions PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES 3 FORWARD-LOOKING STATEMENTS Some of the statements in this report contain forward-looking information. These statements are found in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." They include statements concerning: o our business strategy; o expectations of market and customer response; o liquidity and capital expenditures; o future sources of revenues; o expansion of our proposed product line; and o trends in industry activity generally; You can identify these statements by forward-looking words such as "expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will" or similar words. You should be aware that these statements are subject to known and unknown risks, uncertainties and other factors, including those discussed in the section entitled "Risk Factors," that could cause the actual results to differ materially from those suggested by the forward-looking statements. For example, assumptions that could cause actual results to vary materially from future results include, but are not limited to: o our ability to successfully develop and market our products to customers; o our ability to generate customer demand for our products in our target markets; o the development of our target markets and market opportunities; o our ability to manufacture suitable products at competitive cost; o market pricing for our products and for competing products; o the extent of increasing competition; o technological developments in our target markets and the development of alternate, competing technologies in them; and o sales of shares by existing shareholders 4 PART I ITEM 1: BUSINESS Overview We are a leading developer of microdisplays and related imaging technology, which we believe will be a key enabling component for mobile electronic products, including digital cameras, camcorders, entertainment and gaming headsets, hand-held Internet and telecommunications appliances and personal computers. Using our technology, a microdisplay smaller than one inch diagonally can produce an image that appears comparable to that of a computer monitor or a large-screen television. Our microdisplays are based upon organic light emitting diode (OLED)-on-silicon technology. OLED-on-silicon microdisplays offer a number of advantages over current liquid crystal microdisplays, including increased brightness, lower power requirements, less weight and wider viewing angles. We license fundamental OLED technology from Eastman Kodak and have developed our own technology to create high performance OLED-on-silicon microdisplays and related optical systems. We expect that the integration of our OLED-on-silicon microdisplays into mobile electronic products will result in lower overall system costs to our original equipment manufacturer (OEM) customers. Stanford Resources, an industry market research organization, has recently identified the emergence of OLED technology as a major advance, likely to become a major industry driver. As the first to exploit OLED technology for microdisplays, we believe that we will enjoy a significant advantage in commercializing this new technology. We are the only company to announce and publicly show full-color OLED-on-silicon microdisplays and this achievement has been recognized by the Society for Information Display and Information Display Magazine who designated us as winner of the prestigious Display of the Year Gold Award. We have facilities suitable for producing commercial quantities of our initial microdisplays, and we expect to begin commercial production during the second half of 2001. Our Market Opportunity We expect the increasing demand for high resolution mobile electronic products to drive the growth of the microdisplay industry. According to Display Search, an industry market research organization, the microdisplay market is currently projected to be a $700 million industry in the year 2000 and is expected to grow to $2.3 billion over the next five years. Display Search also projects the overall flat panel display industry will grow from $19.0 billion in 1999 to over $61 billion in 2005. We believe our microdisplays, when combined with compact optic lenses, will become a key component for a number of mobile electronic products. We are targeting the following applications: 5 Near-Eye Viewers for Digital Cameras, Camcorders and hand-held Internet and telecommunications appliances We believe that our microdisplays will enhance near-eye applications in the following products: o Digital cameras and camcorders, which typically use direct view displays that are low resolution, offer a small visual image, and are difficult to see on sunny days. According to Display Search, 41 million digital cameras and 13 million camcorders are expected to be sold in 2005. Some of these products may incorporate microdisplays as high resolution viewfinders which would permit individuals to see enlarged, high resolution proofs immediately upon taking the picture, giving them the opportunity to retake a poor shot. o Mobile phones and other hand-held Internet and telecommunications appliances which will enable users to access full web and fax pages, data lists, and maps in a pocket-sized device. According to the Fuji Chimera Research Institute, an industry market research organization, by 2005 the cellular phone and handheld portable digital assistant markets will grow to 655 million units and 20 million units, respectively. Some of these products may eventually incorporate our microdisplays. For each of these applications, we anticipate that our microdisplays, combined with compact optic lenses, will offer higher resolution, lower power and system cost and achieve larger images than are currently available in the consumer market. As a result, we believe that we can obtain a sizeable share of the market for the display components of these mobile electronic products. Head-wearable displays Head-wearable displays incorporate microdisplays mounted in or on eyeglasses, goggles, or simple head bands. Head-wearable displays may block out surroundings for a fully immersive experience, or be designed as "see-through" or "see-around" to the user's surroundings. Consumer We believe that our head-wearable display products will enhance the following consumer products: o Entertainment and gaming video headset systems, which permit individuals to view television (including HDTV), video CDs, DVDs and video games on virtual large screens or stereovision in private without disturbing others. According to DisplaySearch and Fuji Chimera, gaming systems are expected to be a greater than 46 million unit business by 2005. Some of these products may eventually incorporate our microdisplays. According to Display Search, entertainment video system sales (TV and HDTV) are expected to exceed 166 million units in 2003. Our microdisplays have the potential to displace some of these units. 6 o Notebook computers, which can use head-wearable devices to reduce power as well as expand the apparent screen size and increase privacy. Display Search, Fuji Chimera, and Frost and Sullivan each estimate annual unit sales of notebook computers to exceed 47 million units by 2005. Current notebook computers do not use microdisplays. Our market can apply not only to new notebook computers, but also as aftermarket attachments to older notebooks still in use. We expect to market our head-wearable displays to be used as peripherals with most notebook computers. o Handheld personal computers, whose small, direct view screens are often a limitation, but which are now capable of running software applications that could benefit from a larger display. Microdisplays can be built into handheld computers to display more information content on virtual screens. This market is still in its infancy, but is expected to grow significantly. o Super compact personal computers and personal digital assistants (PDAs) using video headsets as screens can be made possible by high resolution microdisplays. An under one pound pocket-size computer could be created with a fold out keyboard and a headset that provides a near desktop personal computer experience. We believe that the combination of power efficiency, high resolution, low systems cost, brightness and compact size offered by our OLED-on-silicon microdisplays has not been made available to makers and integrators of existing entertainment and gaming video headset systems, notebook computers and handheld computers. In addition, we believe that our microdisplays will catalyze the growth of new products and applications such as lightweight wearable computer systems. Military Military demand for head-wearable displays is currently being met with microdisplay technologies that we believe to be inferior to our OLED-on-silicon head-wearable displays under development. According to Frost and Sullivan, an industry market research organization, the total market for military flat panel displays reached approximately $70 million in 1998 and is projected to grow rapidly through 2005. Frost and Sullivan further projected that the current military microdisplay market of less than $3 million should increase at an overall growth rate in excess of 40 percent, and that microdisplays will penetrate airborne, seaborne, and land applications, providing more mobile and more rugged displays. New uses are being envisioned by the military for individual soldiers, as well as in the areas of simulation, training, operations, maintenance, and logistics in all branches of the military. Commercial and Industrial We believe that a wide variety of commercial and industrial markets offer significant opportunities due to increasing demand for instant data accessibility in mobile workplaces. Some examples of microdisplay applications include: 1) immediate access to inventory (parts, tools and equipment availability), 2) instant accessibility to maintenance or construction manuals, 7 3) routine quality assurance inspection, and 4) real-time viewing of images and data during microsurgery or endoscopy. Our Products We believe that our OLED-on-silicon microdisplay and Microviewer(TM) products which are currently under development will provide low-cost, high resolution and full color video viewing, while maintaining miniature physical size, light weight, and power efficiency. Our initial products include OLED-on-silicon microdisplays, Microviewers(TM) and head-wearable displays. We view our greatest initial opportunities to include those markets where both performance and overall display system cost requirements are not met by current commercially available microdisplays. We believe that our strategy of offering our products as both separate components and integrated bundles that include microdisplays and lenses will allow us to address the needs of the largest number of potential customers. Our three major product groups are: o eMagin OLED-on-silicon microdisplays for integration into consumer and vertical market OEM products. We plan to serve as a component manufacturer by supplying our OLED-on-silicon microdisplays for those customers who have their own lenses or integrated circuits. o eMagin Microviewer(TM) modules that incorporate our OLED-on-silicon microdisplay, compact lenses and electronic interfaces for integration into consumer and vertical market OEM products. We plan to provide a cost-effective and rapid time to market alternative for those customers who want a complete microdisplay and lens assembly to integrate into their end product design. By providing an integrated solution, we plan to allow OEM customers who require optical solutions to avoid incurring expensive design and tooling costs. o eMagin head-wearable display system designs for non-consumer markets (commercial, industrial, medical, and military). Headsets which incorporate Microviewers(TM) can be a part of larger information systems for OEM customers, or attach directly to existing systems platforms. We intend to provide our design and manufacturing capabilities to those customers who want a fully integrated, head-wearable solution. We expect that our product offerings will significantly increase our value-added for our potential customers and increase our revenue and margins. By designing and tooling new microdisplay lenses and compatible solutions at each level required by our various customers, we can reduce cost and time to market for both eMagin and our OEM customers. 8 OLED-on-Silicon Microdisplays Our OLED-on-silicon microdisplays represent a new generation of microdisplay technology. Because our microdisplays generate and emit light, they have a wider viewing angle than the competing liquid crystal microdisplays, and because they have the same high brightness at all forward viewing angles, our microdisplays permit a large field-of-view and superior optical image. The wider viewing angle of our display results in the following superior optical characteristics: (1) the user does not need to as accurately position the head-wearable display to the eye, (2) the image will change minimally with eye movement and appear more natural, and (3) the Microviewer(TM) can be placed further from the eye. In addition, our OLED-on-silicon microdisplays can offer faster response times and use less power than liquid crystal microdisplays. Since our displays are built on integrated circuit silicon chips, many computer and video electronic system functions can be built directly into the display, resulting in very compact, integrated systems. We expect this, coupled with our lenses, to result in lower overall system costs. We have recently completed the development of the first version of our initial customer-oriented microdisplay, which has SVGA+ resolution. We are currently developing a high luminance SXGA integrated circuit. These integrated circuits become microdisplays when OLEDs and color filters are built on top of the integrated circuit. We plan to sell our OLED-on-silicon microdisplays for use as components by customers who prefer to design and build their own lenses. We also plan to offer OLED processing on our customers' integrated circuits to some OEMs who design their own integrated circuits. o 0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns of data) for Consumer OEMs. This display has a resolution of 852 x 3 x 600 pixels. The SVGA+ is planned as a full-color or monochrome microdisplay primarily for high-end consumer OEM products such as video/data head-wearable displays, digital cameras, video cameras and game applications. Several specialty medical, industrial, and military product manufacturers have also expressed interest in this product. The initial stage of technological development of this product is now complete and the monochrome version was demonstrated at an industry convention in Japan in October 2000. We are targeting initial sampling of the color version in 2001. This product is designed to interface with most portable personal computers and will be able to display TV, DVD, and HDTV formats. o 0.77-inch Diagonal SXGA (Super Extended Video Graphics Array) for Industrial, Medical and Military Applications. We are developing an introductory SXGA microdisplay product as a personal computer compatible headset display for military, medical, high-end commercial, and industrial applications. This product will have 1280 x 1024 pixels. This digital video and data interface product is being designed to exhibit a wide dimming range and high luminance for special military applications. We anticipate that the performance features of the SXGA, such as high speed digital video and 256 gray levels, have the potential to serve as a catalyst for the development of new applications. 9 o 0.24-inch Diagonal QVGA (Quarter Video Graphic Array with 320 x 240 pixels) for Consumer OEM Viewfinder and Game Applications. The integrated circuits for these displays are in the early stages of design and development. We plan to market these microdisplays to lower price point camera and gaming applications. We believe OEM customers could insert these displays into existing products and optical systems with relatively little system redesign effort. We expect these microdisplays to be more cost effective for OEM customers than the current liquid crystal microdisplays since our microdisplays use less power, are simpler to assemble, require minimal added circuitry, and require no separate light sources. We also believe our microdisplays can be more compact and provide high quality viewing to the end consumer without some of the problems exhibited by other technologies, such as limited temperature range, flicker, color sequential breakup, or angular light dependence. Microviewer(TM) Products We are developing Microviewer(TM) modules which combine microdisplays with compact optic lenses. Our combination of display and lenses provides large, easy to view images that can be easily adapted to many end products. Our initial display modules are designed to be compatible with a large number of electronics interfaces. We believe that a complete imaging solution may be a fundamental requirement for many new product categories because of the complementary requirements of illumination, lenses, and electronic interfaces. Once a complete Microviewer(TM) module with an electronics interface is made, the creation of a headset or personal viewer appliance primarily involves issues of styling design, feature selection, and market channels. We intend to sell our Microviewer(TM) modules to OEMs for integration with their branded products or incorporated into our eGlass(TM) Personal Viewer(TM) head-wearable displays. Many of our potential customers have stated a preference for Microviewers(TM) over microdisplays since Microviewers(TM) incorporate lenses which save OEMs a step in their manufacturing process. We intend to sample our Microviewer(TM) products concurrently with, or as soon as practicable after, the initial sampling of the base microdisplay. eGlass(TM) Personal Viewer(TM) Head-Wearable Systems Personal Viewer head-wearable systems, such as our eGlass(TM) Personal Viewer(TM), give users the ability to work with their hands while simultaneously viewing information or video on the display. Our head-wearable displays are a versatile computer enabler, capable of delivering an image that appears comparable to that of a 19-inch monitor at 22 inches from the eye using a 1.5 inch Microviewer(TM). We believe that Personal Viewer head-wearable displays will fill the increasing demand for instant data accessibility in mobile workplaces. We expect to sell the head-wearable displays primarily to OEM systems and equipment customers. Our initial head-wearable products utilize technologies other than OLED and we may continue to use such technologies in the future. 10 Our Strategy Our strategy is to establish and maintain a leadership position in the microdisplay industry by capitalizing on our leadership in both OLED-on-silicon technology and microdisplay lenses technology. We intend to: Leverage our superior technology to establish a leading market position. As the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a significant advantage in bringing this technology and its variants to market. We believe that we have consolidated this advantage through our Eastman Kodak license, other strategic relationships, and the development of our own substantial intellectual property portfolio. We have an experienced management team with substantial product development and manufacturing acumen. We plan to maintain and further dedicate significant resources to expand our expertise and to protect our intellectual property. We will also continue our technology development collaborations with third parties. We believe that by leveraging our intellectual property and our design capabilities, we can become a leader in the emerging microdisplay industry. Develop products for large consumer markets through key relationships with OEMs. We expect our first target markets, entertainment and gaming systems and personal computers, to create the first large-scale opportunities for our OLED-on-silicon microdisplays. Our relationships with OEMs for these products, have allowed us to identify initial microdisplay products to be produced for headsets, followed by other applications such as digital cameras, camcorders and hand-held Internet and telecommunications appliances. We expect digital cameras, camcorders, and hand-held Internet and telecommunications appliances to emerge as significant markets as production costs are reduced. Increase revenues by completing our OEM qualification cycle. We have been approached by a number of OEMs who are interested in incorporating our SVGA+ microdisplay into their products. We intend to ship evaluation packages to OEMs by mid-2001, which is the first step towards having the SVGA+ qualified for use at the OEM level. The OEM qualification process typically takes 6 to 24 months. We then expect to receive our first volume orders for our microdisplays. We have maintained detailed communications during the design phase of the SVGA+ with several prospective customers. As subsequent products are developed, they will usually go through a similar evaluation cycle. Optimize manufacturing efficiencies. We intend to outsource certain capital-intensive portions of microdisplay production to minimize both our costs and time to market. We intend to outsource integrated circuit fabrication while retaining the OLED application and OLED sealing processes in-house. We believe that these areas are where we have a core competency and manufacturing expertise. We also believe that by keeping these processes in-house we can protect our proprietary technology and process know-how. This strategy will also enhance our ability to continue to optimize and customize processes and devices to meet customer needs. In the area of lenses and head-wearable displays, we intend to focus on design and development, while working with third parties for the manufacturing and distribution of finished products. Similarly, we intend to outsource volume manufacturing operations for optical systems while 11 continuing to prototype and use low volume capability in-house. We will continue to outsource part of our manufacturing when we deem it to be appropriate. Build and maintain strong internal design capabilities. As more circuitry is added to OLED-on-silicon devices, the cost of the end product using the display can be decreased; therefore integrated circuit design capability will become increasingly important to us. To meet these requirements, we intend to continue to support building strong in-house design capabilities. Building and maintaining this capacity will allow us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. In addition, we intend to maintain a product design staff capable of rapidly developing prototype products for our customers and strategic partners. Contracting third party design support to meet demand and for specialized design skills is expected to remain a part of our overall long term strategy. Our Strategic Relationships Strategic relationships have been an important part of our research and development efforts to date and are an integral part of our plans for commercial product launch. We have forged strategic relationships with major OEMs and strategic suppliers. We believe that strategic relationships allow us to better determine the demands of the marketplace and, as a result, allow us to focus our research and development activities to better meet our customer's requirements. Moreover, we expect to provide microdisplays and Microviewers(TM) to some of these partners, thereby solidifying and utilizing established distribution channels for our products. Eastman Kodak is a technology partner in OLED development, OLED materials, and a potential future customer for both specialty market display systems and consumer market microdisplays. Eastman Kodak owns equity in eMagin and is an advisor to our Board of Directors. We license Eastman Kodak's OLED technology portfolio. We have a nonexclusive, worldwide license to use Eastman Kodak patented OLED technology and associated intellectual property in the development, use, manufacture, import and sale of microdisplays. The license covers emissive active matrix microdisplays with a diagonal size of less than 2 inches. Our license expires upon the expiration of the last-to-expire issued Eastman Kodak OLED technology related patent covered under the license agreement. An annual minimum royalty is paid upfront at the beginning of each calendar year and is fully creditable against the royalties we are obligated to pay based on net sales throughout the year. We have also granted to Eastman Kodak a nonexclusive right to patents and associated intellectual property relating to OLED technology developed by us, including the right to sublicense such technology to third parties, in exchange for royalty payments in certain instances. Eastman Kodak and eMagin have also engaged in numerous discussions regarding potential product applications for eMagin's microdisplays by Eastman Kodak. o We have entered into a joint research and development agreement with IBM to accelerate the development of OLED-on-silicon technology. The OLED-on-silicon microdisplays 12 developed under the agreement have the potential to be incorporated in future IBM products currently in exploratory or product development stages. Nonexclusive, fully-paid-up license rights are available to us or IBM for any intellectual property developed solely by the other party under the agreement. This technology will be incorporated into microdisplays for possible use in future microdisplay products, including those manufactured by IBM, such as wearable computers and handheld portable Internet appliances. The technology efforts resulted in the development of a prototype watch computer utilizing the Linux operating system, which features the world's first direct view OLED-on silicon-display. The prototype was publicly demonstrated in January 2001 at the Consumer Electronics Show. We also have a joint OLED materials development effort with Covion Organic Semiconductors GmbH, a spin-off of Hoechst. We have worked with Honeywell, Kaiser Electronics and Raytheon on a variety of U.S. government research and development proposals and contracts toward the development of displays for military and consumer applications. The US Air Force and US Army are currently providing support under government research and development contracts for microdisplay development with a goal of future procurement. We currently also maintain industry relationships with LG Electronics, Harris, Boeing, Department of Defense Advanced Research Projects Agency (DARPA), NASA, Department of Commerce National Institute of Science and Technology (NIST), Lawrence Livermore National Laboratories, Carnegie Mellon University, and the United States Display Consortium, among others. We intend to establish additional strategic relationships in the future. Our Technology We are in the later stages of development of advanced microdisplay components and modules based on OLED-on-silicon technology. We have invested over $34 million in developing OLED-on-silicon and related technologies during the past four years which we believe will allow us to offer our potential customers state-of the art microdisplay solutions. Additionally, approximately $27 million in government funding has been applied toward further establishing our overall technological capability in displays, most of which is directly applicable to our microdisplay technology. We believe that our existing and development-stage display technologies will position us to meet customer requirements for performance and price for a variety of applications that require high resolution, wide field of view, and low power consumption. OLED-on-Silicon Technology Scientists working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are thin films of stable organic materials that emit light of various colors when a voltage is impressed across them. OLEDs are emissive devices, which means they create their own light, as opposed to liquid crystal displays, which require a separate light source. As a result, OLED devices use less power and can be capable of higher brightness and fuller color than liquid crystal 13 microdisplays. Because the light they emit is Lambertian, which means that it appears equally bright from most forward directions, a moderate movement in the eye does not change the image brightness or color as it does in existing technologies. OLED films may be coated on computer chips, permitting millions of individual low-voltage light sources to be built on silicon integrated circuits to produce single color, white, or full-color display arrays. Many computer and video electronic system functions can be built directly into a silicon integrated circuit upon which the OLED may be coated, resulting in an ultra-compact system. We believe these features, together with the well-established silicon integrated circuit fabrication technology of the semiconductor industry, make our OLED-on-silicon microdisplays attractive for numerous applications. We believe our technology licensing agreement with Eastman Kodak, coupled with our own intellectual property portfolio, gives us a leadership position in OLED and OLED-on-silicon microdisplay technology. Eastman Kodak provides many of the underlying OLED technologies and we provide additional technology advancements that have enabled us to coat the silicon integrated circuits with OLEDs. We expect OLED-on-silicon to bring features and benefits to the microdisplay market including: high resolution, high luminance, flicker-free imaging, high energy efficiency, thin, compact size, and low system cost. We believe that the combined quality of these features surpasses any other microdisplay technology currently available. OLED-on-silicon technology also permits many additional functions to be integrated into the silicon integrated circuit as part of the OLED microdisplay, making OLED-on-silicon a logical choice for microdisplay system solutions. We have developed numerous and significant enhancements to OLED technology as well as key silicon circuit designs to effectively incorporate the OLED film on a silicon integrated circuit. For example, we have developed a unique, up-emitting structure for our OLED-on-silicon devices that enables OLED displays to be built on opaque silicon integrated circuits rather than only on glass. Our OLED devices can emit full visible spectrum light that can be isolated with color filters to create full color images. Our microdisplay prototypes have a brightness that can be greater than that of a typical notebook computer and can have a potential lifetime of over 50,000 hours, in certain applications. New materials and device improvements in development offer the future potential for even better performance for brightness, efficiency, and lifespan. Additionally, we have invested considerable work over several years to develop unique electronics control and drive designs for OLED-on-silicon microdisplays. In addition to our OLED-on-silicon technology, we have developed compact optic and lens enhancements which, when coupled with the microdisplay, provide the high quality large screen appearance that we believe a large proportion of the marketplace demands. 14 Advantages of OLED Technology We believe that our OLED-on-silicon technology provides significant advantages over existing solutions in our targeted microdisplay markets. We believe these key advantages will include: o Low manufacturing cost; o Low cost system solutions; o Wide angle light emission resulting in large apparent screen size; o Low power consumption for improved battery life and longer system life; o Long operating life; o High brightness for improved viewing; and o High speed performance resulting in clear video images. Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on an 8-inch silicon wafer using existing automated OLED and color filter processing tools. The level of automation used lowers labor costs. Only a small amount of OLED material is used in OLED-on-silicon microdisplays so that material costs, other than the integrated circuit itself, are small. Low cost systems solutions. In general, an OEM using OLED-on-silicon microdisplays will not need to purchase and incorporate lighting assemblies, color converter related Applications Specific Integrated Circuits (ASICs), or beam splitter lenses as is the case in liquid crystal microdisplays. Many important display-related system functions can be incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of the system. Lenses for many OLED-on-silicon applications can be made of a single piece of molded plastic which reduces size, weight and assembly cost when compared to the multipiece lens systems used for liquid crystal microdisplays. Because our displays are power efficient, they typically require less power at the system level than other display technologies at a given display size and brightness. Wide angle light emission resulting in large apparent screen size. OLEDs emit light at most forward directions from each pixel. This permits the display to be placed close to the lens in compact optical systems. It also provides the added benefit of less angular dependence on the image quality relative to pupil and eye position when showing a large field of view, unlike reflective liquid crystal on silicon microdisplays. This results in less eye fatigue and makes it relatively easy to position the imaging systems. Low power consumption for improved battery life and longer system life. OLEDs can be energy efficient because of their high efficiency light generation. Power efficiency can be high in OLED displays because they require only low voltage switching (2-5 volts is typical, depending on the mode of operation) and less display-external electronics. Furthermore, OLEDs conserve power by powering only those pixels that are on while liquid crystal on silicon requires light at 15 all pixels all the time. The optical systems used for our OLEDs are highly efficient, permitting over 80% of the light to reach the eye, versus reflective technologies such as liquid crystal on silicon which require multiple beam splitters to get light to the display, and then into the optical system. This results in typically under 25% light throughput efficiency in reflective microdisplay systems. Long operating life. Most of our potential customers require 5,000 to 10,000 hours of half-life. Half-life references how long it takes the operating display to reach half of its starting brightness. We believe our OLED display technology already exceeds these numbers for most of our consumer product applications. High brightness for improved viewing. Because OLEDs have electrical characteristics similar to those of semiconductor diodes, they can run at very high brightness with only a moderate increase in voltage. This will enable us to build extremely bright displays using drive voltages of 24 volts or less. This feature can be of great value to military applications, where there is a need to see the computer image overlayed onto brightly lighted real-life backgrounds such as desert sand, water reflections or sunlit clouds. The OLED can be operated over a large luminance range without loss of gray level control, permitting the displays to be used in a range of dark environments to very bright ambient applications. Since military simulation and situation awareness applications, including night vision, typically require large fields of view, the OLED's Lambertian optical characteristics make it an excellent choice. High speed performance resulting in clear video images. The OLEDs switch much more quickly than liquid crystals or cathode ray tubes (CRTs). This characteristic, coupled with the storage of data at each pixel, results in a stable image and produces no noticeable flicker, even at relatively slow refresh rates. This eliminates visible image smear and makes practicable three-dimensional stereo imaging using a split frame rate. This advantage of our OLED-on-silicon is very important for 3-D stereovision gaming applications. Because the OLED-on-silicon stores brightness and color information at each pixel, the display can be run with no noticeable flicker and no color sequential breakup. Color sequential breakup occurs in systems such as liquid crystal on silicon and some liquid crystal display microdisplays when red, green and blue frames are sequentially imaged in time for the eye to combine. Since the different color screens occur at different times, movement of the eye due to vibration or just fast pupil movement can create color bands at each dark-light edge, making the image unpleasant to view and making text difficult to read. For example, the liquid crystal on silicon display needs to run at least three times the "normal" frame rate or speed to produce color sequential images, which wastes power and makes for a tough technological challenge as display resolutions increase. 16 Our OLED-related Technological Milestones We believe that we have made significant breakthroughs in OLED-on-silicon microdisplay technology and that the following represent key milestones:
Date Milestone - ------------------------- --------------------------------------------------------------------------------- May 1998 The first publicly displayed OLED-on-silicon integrated circuit video graphics array video (monochrome VGA, 640x480 pixels). This showed that OLED microdisplays could be built directly on silicon integrated circuits. February 1999 The first publicly displayed up-emitting full color OLED-on-silicon video. (Low resolution QVGA, 320x240 pixels using color filters). This showed that color video capable OLEDs could be built on silicon integrated circuits using color filters. May 2000 The world's highest efficiency, bright white OLED-on-silicon publicly displayed to date. We also demonstrated the world's highest resolution OLED display publicly displayed to date (1280x1024 pixels) using a new white light emitter in an OLED-on-silicon display. This showed that our OLEDs-on-silicon could provide a good quality bright white image and could generate high resolution moving images with quality gray scale control. September 2000 The first publicly displayed full-color active matrix OLED-on-silicon microdisplay (VGA resolution, 640x480 pixels). The display used color filters built directly on top of the OLED display and incorporated our white light organic light emitting diodes technology. This showed the first near product-quality color moving images using OLED-on-silicon technology. October 2000 We previewed the world's highest resolution super video graphics array (SVGA+, 852 x 3 x 600 pixels, over 1.5 million color elements) which was the first active matrix OLED-on-silicon microdisplay designed for consumer applications ever publicly displayed. The display was shown in white monochrome, but the integrated circuit design is color compatible. January 2001 We demonstrated, with IBM, the world's first direct view OLED-on-silicon microdisplay, which was incorporated into a computer watch which used the Linux operation system. The microdisplay has higher resolution and higher contrast than other similarly sized wrist-worn multi-function displays.
These achievements were recognized by The Society for Information Display (SID) and Information Display Magazine, which designated eMagin Corporation the winner of the prestigious 2000 SID Information Display Magazine Display of the Year Gold Award. 17 Lens System Technology We have developed advanced lens technology for microdisplays and head-wearable display systems and hold key patents in these areas. Our lens technology permits our OLED-on-silicon microdisplays to provide large field of view images that can be viewed for extended periods with reduced eye-fatigue. We believe that the key advantages of our lens technology are that it: o Can be very low cost, with minimal assembly. A one piece, molded plastic optic attached to the microdisplay can serve many consumer end-product markets. Since our process is plastic molding, our per unit production costs are low; o Allows a compact and lightweight lens system that can greatly magnify a microdisplay to produce a large field of view; o Can use single-piece molded microdisplay lenses to permit high light throughput making the display image brighter or permitting the use of less power for an acceptable brightness; o Can be designed to provide focusing to enable users with various eyesight qualities to view images clearly; and o Can provide focal plane adjustment for simultaneous focusing of computer images and real world objects. For example, this characteristic is beneficial for word processing or spreadsheet applications where a person is typing data in from reference material. This feature can make it easier for older people with moderately poor accommodation to use a head-wearable display as a portable computer viewing accessory. Complementary System Technology We have developed a wide range of technologies which complement our core OLED and lens technologies and which we believe will enhance our competitive position in the microdisplay and head-wearable display markets. These include: o Head-wearable display technology. We have developed ergonomic technologies that make head-wearable displays easier to use in a wide variety of applications. For example, the use of our patented rotatable eyeblocker provides a sharp image without requiring most users to squint. The eyeblocker can also be moved to create an effective see-through appearance. We believe that we have made the lightest weight, high-resolution head-wearable display ever publicly demonstrated. o Wireless video technology. We have developed power efficient, miniature, video and stereo sound, radio frequency transmitter-receiver technology as part of a government program. This can allow consumers to watch high quality video without wires from 18 most locations in their home using existing entertainment (e.g., DVD or cable/satellite systems) or data systems. We expect this capability to greatly increase the available market and demand for video and data head-wearable displays and we are considering this technology for use in low cost consumer applications. Sales and Marketing We identify companies with products that we believe would benefit from our display components and contact the potential customers directly. OEMs and their end customers then develop designs, technology, and manufacturing processes to enable them to develop products for our target markets. We plan to provide display components and Microviewer(TM) display-optic modules for OEMs to incorporate in their branded products and sell through established distribution channels. We believe successful marketing will require relationships with recognized consumer brand companies. In addition, we market head-wearable displays directly to various vertical market channels, such as medical, industrial, and government customers. All activities at eMagin evolve by determining and meeting our customers' needs. We began our work on OLED technology over four years ago because we recognized OLED's unique ability to provide a microdisplay solution that would satisfy the market's requirements of low cost, high resolution and complete portability which could not be fully met with alternative technologies. Because our microdisplays are the main functional component that defines many of our end products, we work closely with potential customers to define our products to optimize the final design. In addition, we define and design our products to address common OEM requirements in order to produce optimal designs for multiple customers. We are developing working relationships with several OEMs that sell or plan to sell microdisplay systems. We design our products to meet individual customer requirements, but look for ways to leverage our design and development costs by incorporating multiple customers' requirements into each product. We work closely with potential customers to maximize the probability that our microdisplay and lenses products being designed will match the anticipated future needs of the customers. An OEM design cycle is typically between 6 and 24 months, depending on uniqueness of the market and the complexity of the end product. To date, this process has been handled primarily by senior management of the company. We plan to hire additional marketing and customer service engineers to focus on the largest customers. The marketing staff will identify new customer needs, and help insure that the integrated circuit and electronics designers correctly understand the customers' product specification and delivery needs. Developing customers in the advanced flat-panel display industry involves primarily technical marketing and customer service. We expect that as the market for microdisplays matures and more universal embedded systems become commonplace, the role of traditional OEM component sales will become more important. Our management will continually reassess the success of our marketing and sales methodology to best meet the needs of our customers. 19 Research and Development We have strong internal research and development capabilities, with a staff of more than 60 people, including over 15 Ph.D.s, directly engaged in research and development or directly supporting research and development as a majority of their efforts. OLED technology is a relatively new technology that has considerable room for substantial improvements in luminance, life, power efficiency, voltage swing, design compactness, and many other parameters. We also expect that many manufacturing cost reduction opportunities still require new technology developments. Improving the performance, capability and cost of our products will provide an important competitive advantage in our fast moving, high technology marketplace. The development of improved OLED and display device structures, developing and/or evaluating new materials (including the synthesis of new organic molecules), manufacturing equipment and process development, electronics design methodologies and new circuits and the development of new lenses and related systems are all current projects at this time. We determine research and development projects primarily by near-term customer needs. In order to improve customer satisfaction and simultaneously maximize our margins, we must continue to engage in intensive research and development. External relationships play an important role in our research and development efforts. Suppliers, equipment vendors, government organizations, contract research groups, external design companies, customer and corporate partners, consortia, and university relationships all enhance the overall research and development effort and bring us new ideas. Some of the organizations we have research and development relationships with are: o Eastman Kodak; o IBM; o Covion Organic Semiconductors GmBH, a developer of OLED materials, and o certain research institutes in the Ukraine, including the National Academy of Science of Ukraine. We received a Phase III Small Business Innovation Research grant from the US Air Force, providing $19.6 million to fund research involving the development of high-resolution active matrix organic light emitting diode microdisplays for incorporation into military head-mounted displays. We also work with Eastman Kodak and Honeywell in an Air Force-sponsored dual applications research program to develop ultra-high luminance capable and high temperature compatible OLEDs and with the US Army Night Vision Lab to develop active matrix organic light emitting diode technology. 20 Manufacturing Facilities We are co-located at IBM's Microelectronics Division facility located about 70 miles north of New York City in Hopewell Junction, New York. We lease approximately 25,000 square feet of space housing our own equipment for OLED microdisplay fabrication, and for research and development plus additional space for assembly and administrative offices. We believe that our lease agreement with IBM for a 16,300 square foot class 10 clean room space, along with additional, lower level clean room space, and the associated acquisition of substantial amounts of advanced manufacturing equipment at a favorable cost, represents a substantial asset and competitive advantage. Our lease runs until 2004 and we have the option to then renew it on the same terms for an additional five, one-year terms. Facilities services provided by IBM include cleanroom, pure gases, high purity de-ionized water, compressed air, chilled water systems, and waste disposal support. This infrastructure provided by our lease with IBM provides us with many of the resources of a larger corporation without the added overhead costs. It further allows us to focus our resources more efficiently on our product development and manufacturing goals. We expect our facility to be capable of producing over 50,000 SVGA+ displays per month after equipment that has been ordered becomes fully operational. We expect this capability to be on line in the first half of 2001 and plan capacity expansions as production orders materialize. Further capacity expansions are planned in 2002 as production orders materialize. Our manufacturing process for OLED-on-silicon microdisplays can be separated into four major areas: silicon wafer design and integrated circuit wafer fabrication, vacuum deposition for organic layers, sealing process, and color application. After a device is designed by a combination of internal and external designers with customer participation, we outsource wafer fabrication. Upon receipt of completed wafers, OLED thin film processing takes place in our cleanroom using automated vacuum deposition processes which are set up to deposit OLED materials on single crystal silicon substrates. An automated cluster tool provides all OLED fabrication steps in a highly controlled environment that is the centerpiece of our OLED fabrication. We are in the process of automating our color filter processing capability with the majority of this equipment already on our cleanroom floor. In addition to processing and packaging equipment, we possess electrical and optical instrumentation required to characterize the performance of our displays including photometric and color coordinate analysis. We are also equipped for integrated circuit and electronics design and display testing. We lease additional non-cleanroom facilities for chemical mixing, cleaning, distributed chemical systems, glass polishing, and glass/silicon cutting. We also occupy a research laboratory for organic chemical synthesis where new OLED materials are developed. OLED chemicals are also purified in this laboratory, permitting the company to evaluate new chemicals in pilot production that are not yet available in suitable purity for OLED applications on the market. Our lenses and system development operation at Virtual Vision lease approximately 11,000 square feet of space in Redmond, Washington. The facilities include design stations, plastics milling and preparations, lenses fabrication, product assembly, and office space. The facilities are well suited for designing and building limited volume prototypes and industrial or 21 government products. We plan to outsource high volume head-wearable display production to low cost plastics, lenses, and assembly manufacturers. Intellectual Property We have developed a significant intellectual property portfolio of patents, trade secrets and know-how, supported by our license from Eastman Kodak and our current patent portfolio. Our license from Eastman Kodak gives us the right to use, in microdisplays, a portfolio of more than 50 patents in light emitting diode technology, some of which are fundamental. Our agreement with Eastman Kodak provides for perpetual access to the OLED technology for our OLED-on-silicon applications, provided we remain active in the field and meet our contractual requirements to Eastman Kodak. In our relationship with Eastman Kodak, we share information regarding improvements in the OLED technology and materials generated internally, except where restricted by agreements with other parties. This cooperation permits us to move our research and development forward at a fast pace without needing to dedicate our research and development resources to certain narrow fields. Eastman Kodak and eMagin are also parties to a government research and development program focused on developing ultra-high brightness capable and high temperature compatible OLEDs. Each company is developing certain types of molecules for potential use in different parts of the OLED device structure. In addition to more than 50 patents licensed from Eastman Kodak, we have a portfolio of our own 55 issued patents and 55 patent applications, which are concentrated in the following areas: o OLED Materials, Structures, and Processes o Display Color Processing and Sealing o Active Matrix Circuit Methodologies and Designs o Field Emission and General Display Technologies o Lenses and Tracking (Eye and Head) o Ergonomics and Industrial Design o Wearable Computer Interface Methodology Our patents and patent applications cover a wide range of materials, device structures, processes, and fabrication techniques, such as methods of fabricating full color OLEDs. We believe our patent applications relating to up-emitting structures on opaque substrates such as silicon wafers, which are critical for OLED microdisplays, and applications relating to the hermetic sealing of such structures are particularly important. Our intellectual property also covers a wide range of materials, active matrix circuit techniques and display system designs and lenses, device structures, processes and fabrication methods. We believe that our intellectual property portfolio, coupled with our strategic relationships and accumulated experience in the OLED field gives us an advantage over potential competitors. 22 Competition We believe that our key competition will come from liquid crystal on silicon microdisplays (LCOS), also known as reflective liquid crystal displays. While we believe that OLED-on-silicon provides comparatively lower lenses cost, larger apparent image size, reduced electronics cost and complexity, enhanced color, and improved power efficiency advantages over liquid crystal on silicon microdisplays, there is no assurance that these benefits will be realized or that liquid crystal on silicon manufacturers will not suitably improve these parameters. Color liquid crystal on silicon displays are currently being sampled, and may be in production a year or more earlier than color OLED displays, which could have a significant detrimental effect on our market opportunity. Companies pursuing liquid crystal on silicon technology include Colorado Microdisplay, InViso, Microdisplay Corporation, Three-Five Systems, Silicon Display, and Spatial Light among others. We face competition in the OLED and microdisplay industry from a variety of companies and technologies including Agilent (USA), SEL (Japan), and MicroEmissive Displays (Britain, a start-up company). We may also compete with potential licensees of Universal Display Corporation, Cambridge Display Corporation, and Uniax Corporation. Even though we could potentially license technology from these developers, potential competitors could also obtain licenses and may do so at more favorable royalty rates. However, should they decide to embark on developing microdisplays on silicon, we believe that our progress to date in this area gives us a substantial head start. Our microdisplays and head-wearable display systems may face competition on a price and performance basis from major manufacturers such as Sony and Seiko Epson. However, these companies use first generation liquid crystal on polysilicon technology which we believe is not as advanced as ours, and therefore, we believe that they may incorporate our technology into their products when it becomes available. Laser scanning systems, including systems being developed by Microvision Corporation, offer high brightness imaging, could eventually be low power, and could potentially compete in high ambient light conditions (sunlight) when a large field of view is not required. We may also face competition from electroluminescent image system companies such as Planar. We believe these technologies face many hurdles to becoming a high image quality, low cost, large area full color, near-eye display. Employees As of December 31, 2000, we had a total of 85 employees of which 19 employees were located at Virtual Vision. Of these, 64 employees were engaged in research and development and manufacturing operations, 6 in communications and marketing and 15 in general administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. 23 CERTAIN TRANSACTIONS We were originally incorporated as Fashion Dynamics Corporation on January 23, 1996 under the laws of the State of Nevada. For the three years prior to March 2000, Fashion Dynamics Corporation had no active business operations, and sought to acquire an interest in a business with long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation acquired FED Corporation, a Delaware corporation, through the merger of its wholly-owned subsidiary, FED Capital Acquisition Corporation, with and into FED Corporation. In connection with the merger, Fashion Dynamics Corporation changed its name to eMagin Corporation, which was derived from "electronic imaging," and we listed our securities on the American Stock Exchange. FED Corporation, the operating subsidiary of eMagin Corporation (formerly known as Fashion Dynamics Corporation) also changed its name to eMagin Corporation. Prior to the Merger: o Fashion Dynamics Corporation had 20,156,400 shares of common stock issued and outstanding. o FED Corporation had 5,243,192 shares of common stock issued and outstanding. o FED Corporation had issued warrants to purchase 400,130 shares of its common stock. o FED Corporation had issued options to purchase 1,671,416 shares of its common stock. At the effective time of the Merger: o All outstanding common shares of FED Corporation were converted into common shares of Fashion Dynamics Corporation on a 2:1 basis. o All outstanding warrants to acquire shares of FED Corporation were converted into warrants to acquire shares of Fashion Dynamics Corporation on a 2:1 basis. o All outstanding options to acquire shares of FED Corporation were converted into options to acquire shares of Fashion Dynamics Corporation on a 2:1 basis. Pursuant to rights under the terms of the merger agreement dated March 13, 2000 between the Company, FED Capital Acquisition Corporation and FED Corporation, Citigroup/Travelers Insurance Company designated one board member, Jack Rivkin, Verus International Ltd. designated three board members, Ajmal Khan, Claude Charles and Martin L. Solomon and FED Corporation designated two board members, Gary W. Jones and N. Damodar Reddy. FED Corporation was originally incorporated in 1992 in Raleigh, North Carolina. Its original purpose was the development and commercialization of flat panel display technology for displaying data, information, and video. As a result of its successful research in the area of field 24 emission displays, it was awarded approximately $13 million in government contracts to support field emission display technology development. In 1994, FED Corporation relocated its operations to IBM's East Fishkill, New York campus, and purchased equipment for manufacturing and research and development. In connection with this move, FED Corporation, a Delaware corporation, was incorporated, and FED Corporation, a North Carolina corporation, was merged into the Delaware corporation with the latter being the survivor. In 1996, FED Corporation began work related to the manufacturing and design of microdisplays based upon Eastman Kodak's small molecule, OLED technology in combination with its own intellectual property. In 1997, FED Corporation acquired a license from Eastman Kodak to commercialize this technology. Since 1997, FED Corporation has applied this OLED technology to produce high resolution microdisplay applications in which a small display is magnified via lenses to produce a larger virtual image. In April 1998, FED Corporation acquired Virtual Vision for the purpose of accelerating the emergence of a commercial market for video headsets. This acquisition provided FED Corporation with a second core competency in advanced lenses that complements its expertise in semiconductor and display technology. In 1998 FED Corporation established a sales and marketing office in Santa Clara, California. On March 16, 2000, we entered into a two-year consulting agreement with Verus International Ltd. Verus International Ltd. is a shareholder of eMagin. Additionally, Ajmal Khan, a director of eMagin, also serves as president of Verus International Ltd. Pursuant to the terms of the consulting agreement, we are obligated to pay Verus International Ltd. a fee of $15,000 per month for 24 months from March 16, 2000 in consideration for Verus International Ltd.'s advisory and consulting services offered to us. 25 RISK FACTORS Set forth below and elsewhere in this Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. Risks Related To Our Financial Results We have a history of losses since our inception and expect to incur losses for the foreseeable future. Since our inception, we have incurred significant losses and had an accumulated loss of approximately $100.7 million as of December 31, 2000. We have not achieved profitability and we expect to continue to incur operating losses for the foreseeable future as we fund operating and capital expenditures in areas such as establishment and expansion of markets, sales and marketing, operating equipment and research and development. We cannot assure investors that we will ever achieve or sustain profitability or that our operating losses will not increase in the future. We are presently dependent on U.S. government contracts. The majority of our revenues to date have been derived from research and development contracts with the U.S. federal government. We may continue to rely on such contracts for revenue until volume commercial sales commence. Our government contracts may be terminated by the government at its discretion. We plan to submit proposals for additional development contract funding; however, funding is subject to legislative authorization and even if funds are appropriated such funds may be withdrawn based on changes in government priorities. No assurances can be given that our existing contracts will continue, that we will be successful in obtaining new government contracts, or that programs through which our contracts are funded will continue to be funded beyond the current fiscal year. Our inability to obtain revenues from government contracts could have a material adverse effect on our results of operations. Risks Related To Our Intellectual Property We rely on our license agreement with Eastman Kodak for the development of our products, and the termination of this license, Eastman Kodak's licensing of its OLED technology to others for microdisplay applications, could have a material adverse impact on our business. Our principal products under development utilize OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce key patents held by Eastman Kodak, relating to OLED display technology. Eastman Kodak's patents expire over a range of years from 2002 to 2020. Our license with Eastman Kodak could terminate if we fail to perform any material term or covenant under the license agreement. Since our license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to become a competitor itself or to license its OLED technology for microdisplay applications to others who have the potential 26 to compete with us. The occurrence of any of these events could have a material adverse impact on our business. We may not be successful in protecting our intellectual property and proprietary rights. We rely on a combination of patents, trade secret protection, licensing agreements and other arrangements to establish and protect our proprietary technologies. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. Patents may not be issued for our current patent applications, third parties may challenge, invalidate or circumvent any patent issued to us, unauthorized parties could obtain and use information that we regard as proprietary despite our efforts to protect our proprietary rights, rights granted under patents issued to us may not afford us any competitive advantage, others may independently develop similar technology or design around our patents, and protection of our intellectual property rights may be limited in certain foreign countries. We may be required to expend significant resources to monitor and police our intellectual property rights. Any future infringement or other claims or prosecutions related to our intellectual property could have a material adverse effect on our business. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. Risks Related To The Microdisplay Industry The commercial success of the microdisplay industry depends on the widespread market acceptance of microdisplay systems products. The market for microdisplays is emerging. Our success will depend on consumer acceptance of microdisplays as well as the success of the commercialization of the microdisplay market. At present, it is difficult to assess or predict with any assurance the potential size, timing and viability of market opportunities for our technology in this market. The viewfinder microdisplay market sector is well established with entrenched competitors who we must displace. The microdisplay systems business is intensely competitive. We do business in intensely competitive markets that are characterized by rapid technological change, changes in market requirements and competition from both other suppliers and our potential OEM customers. Such markets are typically characterized by price erosion. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Our ability to compete successfully will depend on a number of factors, both within and outside our control. We expect these factors to include the following: o our success in designing, manufacturing and delivering expected new products, including those implementing new technologies on a timely basis; 27 o our ability to address the needs of our customers and the quality of our customer services; o the quality, performance, reliability, features, ease of use and pricing of our products; o successful expansion of our manufacturing capabilities; o our efficiency of production, and ability to manufacture and ship products on time; o the rate at which original equipment manufacturing customers incorporate our product solutions into their own products; o the market acceptance of our customers' products; and o product or technology introductions by our competitors. Our competitive position could be damaged if one or more potential OEM customers decide to manufacture their own microdisplays, using OLED or alternate technologies. In addition, our customers may be reluctant to rely on a relatively small company such as eMagin for a critical component. We cannot assure you that we will be able to compete successfully against current and future competition, and the failure to do so would have a materially adverse effect upon our business, operating results and financial condition. Competing products may get to market sooner than ours. Our competitors are investing substantial resources in the development and manufacture of microdisplay systems using alternative technologies such as reflective LCDs, LCD-on-Silicon ("LCOS") microdisplays (Colorado Microdisplay, Inc., InViso Inc., The Microdisplay Corporation, Three-Five Systems, Inc., Silicon Display and SpatiaLight, Inc. among others), active matrix electroluminescence and scanning image systems (Planar Systems, Inc. and Microvision Inc.) and transmissive AMLCD (Sony Corporation, Seiko Epson Corporation, and Kopin Corporation). Color LCOS displays are currently in initial production, and may be in volume production a year or more earlier than our microdisplays, which could have a significant detrimental effect on our market opportunity. Our competitors have many advantages over us. We expect to experience intense competition from numerous domestic and foreign companies including well-established corporations possessing worldwide manufacturing and production facilities, greater name recognition, larger retail bases and significantly greater financial, technical and marketing resources than us, as well as emerging companies attempting to obtain a share of the various markets for which our microdisplay products have the potential to compete. Our products are subject to lengthy OEM development periods. We plan to sell most of our microdisplays to OEMs who will incorporate them into products they sell. OEMs determine during their product development phase whether they will incorporate our products. The time elapsed between initial sampling of our products by OEMs, the custom design of our products to meet specific OEM product requirements, and the ultimate 28 incorporation of our products into OEM consumer products could be significant. If our products fail to meet our OEM customers' cost, performance or technical requirements or if unexpected technical challenges arise in the integration of our products into OEM consumer products, our operating results could be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products could adversely effect our business. Our products will likely experience rapidly declining unit prices. In the markets in which we expect to compete, prices of established products tend to decline significantly over time. In order to maintain our profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities to reduce production costs over time, there can be no assurance that these cost reduction plans will be successful. We may also attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes or adjusting our product mix. If we fail to do so, our results of operations would be materially and adversely affected. Risks Related To Manufacturing We expect to depend on semiconductor contract manufacturers to supply our silicon integrated circuits and other suppliers of key components, materials and services. We do not manufacture our silicon integrated circuits on which we incorporate the OLED. Instead, we expect to provide the design layouts to semiconductor contract manufacturers who will manufacture the integrated circuits on silicon wafers. We also expect to depend on suppliers of a variety of other components and services, including circuit boards, graphic integrated circuits, passive components, materials and chemicals, and equipment support. Our inability to obtain sufficient quantities of high quality silicon integrated circuits or other necessary components, materials or services on a timely basis could result in manufacturing delays, increased costs and ultimately in reduced or delayed sales or lost orders which could materially and adversely affect our operating results. We have not manufactured OLED-on-silicon products in commercial quantities and we do not know if our manufacturing yields will be commercially viable. In order for us to be successful as a product or component manufacturer, our products must be manufactured to meet high quality standards in commercial quantities at competitive prices. We have not begun commercial production on any of our OLED-based products and we do not currently have the capability to manufacture products in commercial quantities. The manufacture of OLED-on-silicon is new and OLED microdisplays have not been produced in significant volumes. We expect to begin commercial production during 2001 to meet anticipated demand for our products. If we are unable to produce our products in sufficient quantity, we will be unable to attract customers. In addition, we cannot assure you that once we commence volume production we will attain yields that will result in profitable gross margins or that we will 29 not experience manufacturing problems which could result in delays in delivery of orders or product introductions. We are dependent on a single manufacturing line. We initially expect to manufacture our products on a single manufacturing line. If we experience any significant disruption in the operation of our manufacturing facility we may be unable to supply microdisplays to our customers. For this reason, some OEMs may also be reluctant to commit a broad line of products to our microdisplays without a second production facility in place. Interruptions in our manufacturing could be caused by manufacturing equipment problems, the introduction of new equipment into the manufacturing process or delays in the delivery of new manufacturing equipment. Lead time for delivery of manufacturing equipment can be extensive. No assurance can be given that we will not lose potential sales or be unable to meet production orders due to production interruptions in our manufacturing line. Risks Related To Our Business Our success depends in a large part on the continuing service of key personnel. Changes in management could have an adverse effect on our business. We are dependent upon the active participation of several key management personnel including Gary W. Jones, our Chief Executive Officer and Susan K. Jones, our Executive Vice President who are married to each other. While we currently maintain a key employee insurance policy on our CEO, we may elect to discontinue this insurance at any time. We also need to recruit additional management personnel in order to expand according to our business plan. The failure to attract and retain additional management personnel could have a material adverse effect on our operating results and financial performance. Our success depends on attracting and retaining highly skilled and qualified technical and consulting personnel. We must hire highly skilled technical personnel as employees and as independent contractors in order to develop our products. The competition for skilled technical employees is intense and we may not be able to retain or recruit such personnel. We must compete with companies that possess greater financial and other resources than we do, and that may be more attractive to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits offered to employees in order to attract and retain such personnel. The costs of retaining or attracting new personnel may have a materially adverse affect on our business and our operating results. In addition, difficulties in hiring and retaining technical personnel could delay the implementation of our business plan. Our business depends on new products and technologies. The market for our products is characterized by rapid changes in product, design and manufacturing process technologies. Our success depends to a large extent on our ability to develop and manufacture new products and technologies in order to establish a competitive position and become profitable. Furthermore, we must adopt our products and processes to 30 technological changes and emerging industry standards and practices on a cost-effective and timely basis. Our failure to accomplish any of the above could harm our business and operating results. Our business strategy may fail if we cannot continue to form strategic relationships with companies that manufacture and use products that could incorporate our OLED-on-silicon technology. Our prospects will be significantly affected by our ability to develop strategic alliances with OEMs for incorporation of our OLED-on-silicon technology into their products. While we intend to continue to establish strategic relationships with manufacturers of electronic consumer products, personal computers, chipmakers, lens makers, equipment makers, material suppliers and/or systems assemblers, there is no assurance that we will be able to continue to establish and maintain strategic relationships on commercially acceptable terms, or at all. Failure to do so would have a material adverse effect on our business. We will need to obtain additional financing, which may not be available on suitable terms, and as a result our ability to grow may be limited. Our future liquidity and capital requirements are difficult to predict because they depend on numerous factors, including our success in completing the development of our products, manufacturing and marketing our products and competing technological and market developments. We may not be able to generate sufficient cash from our operations to meet additional working capital requirements, support additional capital expenditures or take advantage of acquisition opportunities. In addition, substantial additional capital may be required in the future to fund product development and product launches. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to us or our shareholders. To the extent we raise additional capital by issuing equity or securities convertible into equity, our current shareholders will suffer dilution in ownership. If needed capital is unavailable, our ability to continue to operate and grow our business could be adversely affected. Our business exposes us to product liability claims. Our business exposes us to potential product liability claims. Although no such claim has been brought against us to date, and to our knowledge no such claim is threatened or likely, we may face liability to product users for damages resulting from the faulty design or manufacture of our products. While we maintain product liability insurance coverage, there can be no assurance that product liability claims will not exceed coverage limits, fall outside the scope of such coverage, or that such insurance will continue to be available at commercially reasonable rates, if at all. 31 Our business is subject to environmental regulations and possible liability arising from potential employee claims of exposure to harmful substances used in the development and manufacture of our products. We are subject to various governmental regulations related to toxic, volatile, experimental and other hazardous chemicals used in our design and manufacturing process. Our failure to comply with these regulations could result in the imposition of fines or in the suspension or cessation of our operations. Compliance with these regulations could require us to acquire costly equipment or to incur other significant expenses. We develop, evaluate and utilize new chemical compounds in the manufacture of our products. While we attempt to ensure that our employees are protected from exposure to hazardous materials we can not assure you that potentially harmful exposure will not occur or that we will not be liable to employees as a result. Our principal stockholders, officers and directors will own a significant voting interest in our voting stock. A large percentage of our outstanding common stock (approximately 35%) is owned by current and former directors and officers of eMagin Corporation or their affiliates. If these shareholders were to vote together, they could significantly influence the outcome of items that are submitted to a vote of the shareholders including the election of our directors. We cannot forecast our future performance. We cannot accurately forecast our revenues because of our limited commercial operating history and because the OLED microdisplay market is only beginning to emerge. We may experience significant fluctuations in our quarterly operating results due to many factors which are outside our control. These factors include: o fluctuation in demand and orders for our products; o timing or cost of future supply or equipment deliveries; o manufacturing capacity and yields; o variations in product and process development costs; o expenses or operational disruptions resulting from acquisitions; o activities of our competitors; and o general economic conditions. Due to these factors, we cannot anticipate with any degree of certainty what our revenues, if any, will be in future periods. You have limited historical financial data and operating results with which to evaluate our business and our prospects. As a result, you should consider our prospects in light of the expense, difficulties and delays frequently encountered by early stage companies formed to pursue development of new technologies. 32 Our share price is likely to be highly volatile which may result in substantial losses for investors. Share price volatility may subject us to securities class action litigation. Our common stock has experienced substantial price volatility. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future. Accordingly, investors in our common stock may experience a decrease in the value of their common stock regardless of our operating performance or prospects. In addition, the trading price of our common stock could be subject to wide fluctuations in response to: o our perceived prospects; o quarter to quarter variations in our operating results; o changes in earnings estimates or recommendations by securities analysts and market perceptions of our operating results in relation to those estimates or recommendations; o changes in market valuation of companies in the microdisplay systems industry; o announcements of technological innovations or new products by us or our competitors; o sales of shares by existing shareholders; and o general conditions in the personal products industries or stock market conditions. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their share price. Those companies, like us, that are involved in rapidly changing technology markets are particularly subject to this risk. This type of litigation, if instituted against us, could result in substantial costs and divert our management's attention and resources, which could cause serious harm to our business. ITEM 2: PROPERTIES Our principal executive offices are located at: 2070 Route 52, Hopewell Junction, New York 12533. We lease approximately 45,000 square feet of space, all of which is located in the same industrial park. Approximately 25,000 square feet of space houses our own equipment for OLED microdisplay fabrication, and for research and development plus additional space for assembly operations. Approximately 20,000 square feet of space is used for administrative offices. Our lease runs until 2004 and we have the option to then renew it on the same terms for an additional five, one-year terms. 33 We occupy 2,200 square feet of office space located in Santa Clara, California under a lease agreement, which expires in January 2002. Our lenses and system development operation at Virtual Vision lease approximately 11,000 square feet of space in Redmond, Washington. The lease for this facility runs until June 2002. eMagin Corporation's telephone number is (845) 892-1900. Our website address is www.eMagin.com. ITEM 3: Legal Proceedings None. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the fourth quarter of the Fiscal Year covered by this Report. 34 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been traded on the American Stock Exchange under the symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000 our common stock had been quoted on the OTC Bulletin Board under our prior name "Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there had been no public trading of FSHD. The table below sets forth, for the periods indicated, the high and low closing prices per share of the common stock as reported on the American Stock Exchange and the OTC Bulletin Board. With respect to OTC Bulletin Board quotes, these prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
High Low ---- --- 2000 First Quarter (through March 16, 2000)..................20.625 5.938 First Quarter (since March 17, 2000)....................22.938 19.500 Second Quarter..........................................20.250 8.500 Third Quarter...........................................13.000 7.875 Fourth Quarter.......................................... 9.750 2.040
As of March 1, 2001, there were 25,069,143 shares of common stock outstanding and 515 holders of record. We have never declared nor paid cash dividends on our capital stock. We intend to retain future earnings, if any, for the development and operation of our business, and do not anticipate paying any cash dividends in the foreseeable future. Any determination whether to pay dividends will depend on a number of factors, including our results of operations, financial position and capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our Board of Directors deems relevant. There are no restrictions that currently limit our ability to pay dividends on our common stock. 35 ITEM 6: SELECTED FINANCIAL DATA You should read the following selected financial data together with Item 7 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements including accompanying notes, and other financial information, all of which are included elsewhere in this report. The selected financial data for the fiscal years ended December 31, 1996, 1997, 1998, 1999, and 2000 are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, independent auditors. The historical results are not necessarily indicative of results to be expected for any future period. Prior to the acquisition of FED Corporation, Fashion Dynamics Corporation had no active business operations. Management believes that the comparison of eMagin's financial results to that of the operating entity (FED Corporation) provides the most meaningful comparative information to the reader. Accordingly, the comparative information that follows, reflects the operating results of FED Corporation for all periods prior to the merger and it should be read in conjunction with the consolidated financial statements and notes thereto of this Form 10-K.
Fiscal Year Ended December 31, ------------------------------------------------------------------- 1996 1997 1998 1999 2000 (1) ------ -------- --------- ---------- ----------- (unaudited) Statement of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Net Contract Revenues............... $224 $3,626 $6,154 $1,895 $3,126 ------ -------- --------- ---------- ----------- Total revenue................ 224 3,626 6,154 1,895 3,126 Costs and Expenses: Research and Development (net of funding under cost sharing arrangements) .............. 4,323 5,234 10,250 10,171 11,815 Non-cash expense for conversion of debt to common stock ....................... -- -- -- 1,917 -- Non-cash stock-based compensation........................ -- -- -- -- 10,319 Amortization of purchase intangibles......................... -- -- -- -- 20,932 Acquired in-process research and development ........... -- -- -- -- 12,820 General and Administrative.......... 2,038 2,015 3,514 5,203 6,145 ------ -------- --------- ---------- ----------- Loss from operations.................. (6,137) (3,623) (7,610) (15,396) (58,905) ------ -------- --------- ---------- -----------
36
Fiscal Year Ended December 31, ------------------------------------------------------------------- 1996 1997 1998 1999 2000 (1) ------ -------- --------- ---------- ----------- (unaudited) Other income (expense)................ 115 (107) (122) (404) (2,616) ------ -------- --------- ---------- ----------- Net loss.............................. (6,022) (3,730) (7,732) (15,800) (61,521) ------ -------- --------- ---------- ----------- Basic and diluted net $ (1.12) $(.69) $(1.42) $(6.04) $(2.95) loss per share........................ Weighted average shares outstanding used in basic and diluted per-share calculation......................... 5,396,729 5,437,537 5,450,293 2,614,743 22,144,904
(1) The summary financial data for the year ended December 31, 2000 represent a pro forma presentation of the results for this period, containing the operating results of eMagin Corporation for the year ended December 31, 2000, with the operating results of FED Corporation for the period from January 1, 2000 through March 15, 2000, in order to present operating results for the year period for comparative purposes.
As of December 31 --------------------------------------------------------------- 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ Balance Sheet Data: (IN THOUSANDS) Working capital (deficit)................ $7,810 $ 2,888 $ 3,371 $(3,295) $ 6,243 Total assets............................. 10,334 6,906 11,163 5,038 62,549 Current maturities of long-term debt..... -- -- 62 269 313 Short-term debt.......................... -- -- -- 2,127 -- Total shareholders' equity .............. $ 4,718 $ 1,016 $ 4,693 $60 $ 59,184
37 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following discussion should be read together with our financial statements and the notes to those statements and other financial information appearing elsewhere in this report. Our fiscal year ends December 31. Overview We are a leading developer of OLED-on-silicon microdisplays and optics systems. Our fundamental expertise is in combining low cost integrated circuits with flat, emissive display technologies to provide high quality imaging systems in a thin, lightweight format with features we believe to be superior to existing microdisplay technologies. We are planning to begin commercial manufacturing and distribution of our products and technology as components to OEM system manufacturers for near-eye and headset applications in products such as entertainment and gaming headsets, handheld Internet and telecommunication appliances, and wearable computers. eMagin Corporation was originally incorporated as Fashion Dynamics Corporation on January 23, 1996 under the laws of the State of Nevada. For the three years prior to the merger, Fashion Dynamics Corporation had no active business operations, and sought to acquire an interest in a business with long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation acquired FED Corporation (derived from field emissive device), subsequently changed its name to eMagin Corporation (derived from "electronic imaging") and listed its common stock on the American Stock Exchange under the "EMA" trading symbol. Under the terms of the merger, Fashion Dynamics Corporation issued approximately 10.5 million shares of its common stock to FED Corporation shareholders and issued approximately 3.9 million options and warrants in exchange for existing FED options and warrants. The total purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of a simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. Under the purchase method of accounting, the assets and liabilities were recorded based upon their fair values at the date of acquisition as determined by an independent appraisal. The purchase price was allocated as follows: (in millions) Deferred compensation $13.0 In-process research and development 12.8 Fixed assets 1.2 Other intangible assets 16.9 Goodwill 54.6 ---- $98.5 ----- 38 We amortize goodwill and other intangible assets acquired over their estimated useful lives of three years. We recorded approximately $20.9 million in amortization expense related to purchased intangible assets for the year ended December 31, 2000. In accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs", as clarified by Financial Accounting Standards Board Interpretation No. 4, amounts assigned to in-process research and development are to be charged to expense as part of the allocation of purchase price. The amount allocated to acquired in-process research and development related to projects that had not yet reached technological feasibility and that, until completion of development, had no alternative future use. These projects require substantial development and testing prior to reaching technological feasibility and may not develop into products that may be sold by us. For the three years prior to the acquisition of FED Corporation, Fashion Dynamics Corporation had no active business operations. Management believes that the comparison of eMagin's financial results to that of the operating entity (FED Corporation) provides the most meaningful comparative information to the reader. Accordingly, the following comparative information reflects the operating results of FED Corporation for all periods prior to the merger and it should be read in conjunction with the consolidated financial statements and notes thereto of this prospectus. The comparison of financial information below for the period ended December 31, 2000 reflects pro forma results of eMagin for the period January 1, 2000 through December 31, 2000 and its predecessor FED Corporation for the period January 1, 2000 to March 15, 2000, on a combined basis, such that the amounts presented and discussed reflect the full year of operations for each period. Reference is made to our consolidated financial statements that are included herein for further detail on the results of eMagin and FED Corporation for their respective periods of ownership. Our history has been as a developmental stage company. We intend to significantly increase our marketing, sales, and research and development efforts, and expand our operating infrastructure. Most of our operating expenses will be fixed in the near term. If we are unable to generate significant revenues, our net losses in any given quarter could be greater than expected. As a result, you should consider our prospects in light of the early stage of our business in a new and rapidly evolving market. The following are descriptions of the revenue and expense components of our statement of operations: Net contract revenues currently represent revenues mostly from contracts funded by U.S. government programs. We have historically earned revenues from certain of our research and development activities under both fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts. Revenues relating to fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profit based on the relationship of costs and the allocation of allowable indirect costs as defined by each contract. The amount of revenues earned is dependent upon the execution of new government contracts, which may not be predictable or consistent from period to period because 39 of variations in government funds allocated to research and development in our field of technology. Research and development expenses represent salaries, development materials, external contracts, equipment lease and depreciation expense, electronics, rent, utilities and costs associated with operating our manufacturing facility. These costs are expensed as incurred. We have received cost sharing awards from certain U.S. government agencies to fund certain research and development. Funding from this type of contract is recognized as a reduction in research and development operating expenses during the period in which the services are performed and related direct expenses are incurred. As of December 31, 2000, the remaining amounts to be incurred and billed on these active "cost sharing" contracts totaled $1.4 million. Non-cash stock-based compensation expense represents expenses associated with stock option grants to our officers and employees at below fair market value as additional compensation for their services and to induce them to lock-up their options for a longer time then would normally be specified under the Company's standard option grant. Deferred compensation is amortized over the remaining vesting period of the underlying options. The expense also represents warrant grants with exercise prices below fair market value to security holders of eMagin for a reduced number of warrants to induce them to lock-up prior to the merger. Amortization of purchased intangibles represents the cost of amortization of the value of goodwill and other acquired intangible assets. The purchased intangibles are amortized over their expected useful lives of three years on a straight-line basis. Selling, general and administrative expenses principally represent the cost of salaries and fees for professional services, legal fees incurred in connection with patent filings and related matters, depreciation and amortization, and other administrative expenses as well as expenses associated with marketing. Basic and diluted net loss per common share is computed by using the weighted average number of shares of common stock outstanding during the period, restated for the effect of the merger upon the number of shares outstanding in the current year, and for the presentation of the net loss per share for the predecessor, a stock split effected during 1999. No common stock equivalents have been included in the computation of weighted average shares outstanding, as their effect would be anti-dilutive. 40 Results of Operations Comparison of our financial results for the years ended December 31, 1998, 1999 and 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenues Revenues increased to $3.1 million for the year ended December 31, 2000 from $1.9 million for the year ended December 31, 1999, representing an increase of 63%. This increase was due primarily to the recognition of revenue from certain government contracts relating to head-wearable displays. Research and Development Expenses Gross research and development expenses increased to $13.3 million for the year ended December 31, 2000 from $11.2 million for the year ended December 31, 1999, representing a 17.7% increase. Of these amounts, we received $1.5 million in cost sharing from the U.S. government for the year ended December 31, 2000, and $1.1 million for the year ended December 31, 1999. The $2.1 million increase in gross expenses for the year ended December 31, 2000 reflects the additional costs associated with personnel costs, equipment leases, depreciation, and material costs resulting from increased research and development activities and equipment additions at our manufacturing facility. Non-Cash Stock-Based Compensation Expense Non-cash stock-based compensation expense was $10.3 million for the year ended December 31, 2000 versus no activity for the year ended December 31, 1999. The activity, for the year ended December 31, 2000, reflects the amortization of deferred compensation costs related to the issuance of stock options, warrants issued and re-priced warrants and options at below fair market values in the first quarter of 2000. Amortization of Purchased Intangibles Amortization of purchased intangibles expense increased to $20.9 million for the year ended December 31, 2000 from $0.8 million for the year ended December 31, 1999. The $20.1 million increase in amortization for purchased intangibles expense is the result of non-cash charges related to the amortization of goodwill and intangibles created by the merger. Acquired In-Process Research and Development In connection with the merger, we allocated $12.8 million of the purchase price to acquired in-process research and development. Accordingly, these costs were expensed during the year upon finalization of a third party appraisal. 41 General and Administrative Expenses General and administrative expenses increased to $6.1 million for the year ended December 31, 2000 from $5.2 million for the year ended December 31, 1999, representing a 17.3% increase. The $0.9 million increase in selling, general and administrative expenses was due primarily to increases in marketing activity, personnel costs, travel and patent filings. Other Income (Expense) Other expenses increased to $2.6 million for the year ended December 31, 2000 from $0.4 million for the year ended December 31, 1999. The increase of $2.2 million was due primarily to the amortization of the debt discount from the beneficial conversion of a bridge loan entered into by us prior to the merger. Net Loss Per Common Share The following provides a reconciliation of information used in calculating the per share amounts for the year ended December 31, 2000 and December 31, 1999. The 1999 loss attributable to common shareholders includes an effect of an induced conversion of convertible preferred stock that took place in June 1999. 2000 1999 ---- ---- Loss attributable to common shareholders Net loss $(61,521,866) $(15,800,245) ------------ ------------ Effect of induced conversion of Convertible Preferred Stock (7,576,862) ------------ ------------ Loss attributable to common shareholders $(61,521,866) $(23,377,107) ============ ============ Weighted average shares outstanding 22,144,904 2,614,743 Basic and diluted loss per common share $ (2.78) $ (8.94) ============ ============ 42 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues Revenues decreased to $1.9 million in 1999 from $6.2 million in 1998, representing a 69% decrease. Revenues were lower due to reduced U.S. government contract volume as a contract was completed during 1999 and the type of U.S. government contract we engaged in changed primarily to "cost sharing" from "cost-plus-fee" contracts. Research and Development Expenses Gross research and development expenses decreased to $11.3 million in 1999 from $11.5 million in 1998, representing a 2% decrease. The $0.2 million decrease for 1999 reflects lower direct material costs. Of these amounts, we received $1.1 million in cost sharing from the U.S. government for 1999 and $1.3 million in 1998. As of December 31, 1999, the remaining amounts to be incurred and billed on four active "cost sharing" contracts totaled $3.3 million. Non-Cash Expense For Conversion of Debt to Common Stock In 1999, we recorded a non-cash charge of $1.9 million for the conversion of $4.0 million of senior debt to 1,449,276 shares of common stock, which reflected a benefit the bondholder received at the date of conversion of the fair market value of the common stock over the contractual conversion price. General and Administrative Expenses General and administrative expenses increased to $5.2 million in 1999 from $3.5 million in 1998, representing a 49% increase. The increase in general and administrative expenses was primarily related to the establishment of a sales and marketing office in Santa Clara, California and additional patent filings. Other Income (Expense) Other expenses increased to $0.4 million in 1999 from $0.1 million in 1998. The increase of $0.3 million was due to higher interest rates and a lower cash balance than in 1998. Net Loss The net loss increased to $15.8 million in 1999 from $7.7 million in 1998. Liquidity and Capital Resources Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our products, market acceptance of our products and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our products in our target markets, hire and train 43 additional staff, expand our research and development activities, develop and expand our manufacturing capacity and begin production activities. Through December 31, 2000 we have incurred accumulated losses of approximately $100.7 million since our inception and we anticipate incurring significant losses as we fund our growth. Since inception we have financed our operations through private placements of equity securities, research and development contracts and borrowings. As of December 31, 2000, we had $7.4 million in cash and cash equivalents. Net cash used in operating activities was $14.5 million for the year ended December 31, 2000. Cash used in operating activities resulted primarily from our net loss partially offset by increases from non-cash charges. Cash used in operating activities for 1999 was $8.6 million and $6.3 million in 1998 resulting primarily from operating losses. Net cash provided by investing activities was $0.4 million for the year ended December 31, 2000. This represented net cash acquired in acquisition of $1.2 million, offset by capital expenditures of $0.8 million. Net cash used by investing activities in 1999 was $0.3 million primarily for capital expenditures. In 1998, net cash used in investing activities was $1.2 million primarily for capital expenditures and the acquisition of Virtual Vision. Net cash provided by financing activities was $22.0 million for the year ended December 31, 2000, and consisted primarily of proceeds from the issuance of common stock in a private placement of $22.5 million offset by decreases in short term debt and capital leases of $0.5 million. Cash provided by financing activities for 1999 was $7.7 million primarily from the issuance of short-term debt and the issuance of preferred stock. In June of 1999, all of the preferred shareholders voted to convert their shares into common stock at conversion rates that ranged between 2.8 to 5.5 shares of common stock for each share of preferred stock. Cash provided by financing activities for 1998 was $6.9 million primarily from the issuance of preferred stock. We currently anticipate that we will continue to experience significant growth in our operating expenses for the foreseeable future and that our operating expenses will be a material use of our cash resources. We expect that we will need to raise additional equity or debt financing in the future. There can be no assurance that additional equity or debt financing will be available on acceptable terms or at all. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned product development, selling and marketing activities and expansion of our manufacturing facilities, which would have a material adverse effect on our business, financial condition and operating results. In the event that we raise additional equity financing, further dilution to investors could result. 44 Unaudited Quarterly Results of Operations for the Years Ended December 31, 2000 and 1999
Year ended December 31, 2000 ---------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Revenues $12,266 $828,394 $1,011,763 $705,164 Net loss (2,257,156) (11,004,386) (24,036,650) (10,868,625) Net loss per share Basic and diluted $(0.17) $(0.44) $(0.96) $(0.43) Year ended December 31, 1999 ---------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Revenues $ -- $ -- $ -- $ -- Net loss (326) (3,327) (2,027) (12,772) Net loss per share Basic and diluted $ -- $(0.0005) $(0.0003) $(0.002)
Recent Accounting Pronouncements In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.138 "Accounting for Certain Derivative Instrument and Certain Hedging Activities," which amends the accounting and reporting standards of SFAS No. 133, "Accounting for Derivatives and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 2000 (as amended by SFAS No. 137) and will not require retroactive restatement of prior-period financial statements. Management believes the adoption of SFAS 133 will not have a material impact on the Company. In March 2000, the FASB issued interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving Stock Compensation-An Interpretation of APB Opinion No. 25." Among other things, FIN 44 clarifies the definition of employees, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain of its conclusions cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company adopted the provisions of FIN 44 as of July 1, 2000. 45 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of the Company's cash equivalents and investment securities are at fixed interest rates, and as such, the fair market value of these instruments is affected by changes in market interest rates. As of December 31, 2000, all of the Company's cash equivalents and investment securities mature within one year. Accordingly, we believe that the market risk arising from our holdings of these financial instruments is immaterial. However, in the future, we may invest in securities with maturities of more than one year, which may carry greater interest rate risk. Presently, all of the Company's research and development contract payments are made in U. S. dollars and, consequently, we believe we have no direct foreign currency exchange rate risk. However, in the future, we may enter into contracts in foreign currencies, which may subject the Company to foreign exchange rate risk. We do not have any derivative instruments and do not presently engage in hedging transactions. 46 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENT INDEX
Page ---- FINANCIAL STATEMENTS FOR EMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.) Report of Independent Public Accountants (Arthur Andersen LLP).............................................. 48 Report of Independent Public Accountants (Barry L. Friedman)................................................ 49 Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 .................................. 50 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, 1998 and for the period from inception (January 23, 1996) through December 31, 2000 ..................................... 51 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999, 1998, and 1997 and the period from inception (January 23, 1996) to December 31, 1996................................... 52 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, 1998 and for the period from inception (January 23, 1996) through December 31, 2000 ..................................... 53 Notes to Consolidated Financial Statements.................................................................. 55 FINANCIAL STATEMENTS FOR FED CORPORATION (PREDECESSOR) Report of Independent Public Accountants.................................................................... 66 Consolidated Balance Sheets as of December 31, 1999......................................................... 67 Consolidated Statements of Operations for the period from January 1, 2000 to March 15, 2000 (unaudited), the years ended December 31, 1999 and 1998 and for the period from inception (January 6, 1992) through December 31, 1999................................................... 68 Consolidated Statements of Changes in Stockholders' Equity for the period from inception to December 31, 1992 and each of the seven years ended December 31, 1999............................................ 69 Consolidated Statements of Cash Flows for the period from January 1, 2000 to March 15, 2000 (unaudited), the years ended December 31, 1999 and 1998 and for the period from inception (January 6, 1992) through December 31, 1999................................................... 73 Notes to Consolidated Financial Statements.................................................................. 75
47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of eMagin Corporation: We have audited the accompanying consolidated balance sheet of eMagin Corporation (a Nevada corporation in the development stage; see Note 1) and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended and the related consolidated statements of operations, shareholder's equity and cash flows for the period from inception (January 23, 1996) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of eMagin Corporation for the period from inception to December 31, 1999. Such statements are included in the cumulative from inception to December 31, 2000 totals of the statements of operations, shareholder's equity and cash flows and reflect a total net loss of less than a percent of the related cumulative totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to amounts from the period from inception to December 31, 1999, included in the cumulative totals, is based solely upon the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of eMagin Corporation and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended, and for the period from inception to December 31, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations since inception raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. New York, New York Arthur Andersen LLP February 28, 2001 48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors FASHION DYNAMICS CORP.: I have audited the accompanying Balance Sheets of FASHION DYNAMICS CORP. (A Development Stage Company), as of December 31, 1999 and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FASHION DYNAMICS CORP. (A Development Stage Company), as of December 31, 1999 and the results of its operations and cash flows for the years ended December 31, 1999 and December 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has no established source of revenue. This raises substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Barry L. Friedman Certified Public Accountant 1582 Tulita Drive Las Vegas, NV 89123 702-361-8414 Las Vegas, Nevada February 17, 2000 Where Barry L. Friedman, CPA is not the accountant for the most recent fiscal year ended, and he has audited one or more of the prior fiscal years. Barry L. Friedman was a sole practitioner in his capacity as the Company's previous auditor. This represents a copy of Barry L. Freidmans's previously issued report, which he is unable to reissue in accordance with Rule 2-02(a) of Regulation S-X due to his untimely demise, and hence, no longer in practice. 49 eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.) (a development stage company) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents ....................... $ 7,367,257 -- Contract receivables ............................ 825,733 -- Costs and estimated profits in excess of billings on contracts in progress ..................... 627,347 -- Prepaid expenses and other current assets ....... 665,222 -- ------------- ----------- Total current assets ............... 9,485,559 -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net ........... 1,268,304 -- GOODWILL AND PURCHASED INTANGIBLES, net ............. 51,689,938 -- OTHER LONG-TERM ASSETS .............................. 105,394 -- ------------- ----------- Total assets ....................... $ 62,549,195 $ -- ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................... $ 161,025 $ -- Accrued payroll ........................................... 1,376,888 -- Accrued expenses .......................................... 935,746 -- Advance payments on contracts to be completed ............. 311,812 -- Current portion of long-term debt ......................... 313,074 -- Other current liabilities ................................. 144,000 -- ------------- ----------- Total current liabilities .................... 3,242,545 -- ------------- ----------- LONG-TERM DEBT ................................................ 122,984 -- ------------- ----------- COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY: Common stock, $.001 par value, 40,000,000 and 25,000,000 shares authorized, 25,069,143 and 20,156,400 shares issued and outstanding, respectively ........................................... 25,069 20,156 Additional paid-in capital ................................ 116,622,811 10,844 Deferred compensation ..................................... (9,266,397) -- Deficit accumulated during the development stage .......... (48,197,817) (31,000) ------------- ----------- Total shareholders' equity ................... 59,183,666 -- ------------- ----------- Total liabilities and shareholders' equity .................................... $ 62,549,195 $ -- ============= ===========
The accompanying notes are an integral part of these consolidated balance sheets. 50 eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.) (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from inception (January 23, 1996) to December 31, 2000
Period from Inception (January 23, 1996) to December 31, 2000 1999 1998 2000 ------------ ------------ ------------ ------------ CONTRACT REVENUES ................... $ 2,557,587 $ -- $ -- $ 2,557,587 ------------ ------------ ------------ ------------ Total revenues ........ 2,557,587 -- -- 2,557,587 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $1,328,121, $0, and $0, respectively ..... 9,634,948 -- -- 9,634,948 General and administrative ...... 5,149,513 18,452 3,477 5,180,513 Amortization of purchased intangibles .................. 20,932,320 -- -- 20,932,320 Acquired in-process research and development .................. 12,820,000 -- -- 12,820,000 Non-cash stock based compensation ................ 2,539,828 -- -- 2,539,828 ------------ ------------ ------------ ------------ Total costs and expenses, net ................ 51,076,609 18,452 3,477 51,107,609 ------------ ------------ ------------ ------------ OTHER INCOME, NET ................... 352,205 -- -- 352,205 ------------ ------------ ------------ ------------ Net loss .............. $(48,166,817) $ (18,452) $ (3,477) $(48,197,817) ============ ============ ============ ============ Basic and diluted loss per share .. $ (2.18) $ (0.00) $ (0.00) Basic and diluted weighted average shares outstanding .............. 22,144,904 21,156,400 21,156,400
The accompanying notes are an integral part of these consolidated statements. 51 eMAGIN CORPORATION (FORMERLY FASHION DYNAMICS CORP.) (a development stage company) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (JANUARY 23, 1996) to DECEMBER 31, 1996 and FOR EACH of the FOUR YEARS ENDED DECEMBER 31, 1997, 1998, 1999, AND 2000
Deficit Accumulated Additional during the Number of $0.001 par Paid- in Deferred development Shares value Capital Compensation stage Total ------------------------------------------------------------------------------------- February 6, 1996 Issued for Cash 600,000 600 5,400 - - 6,000 Net loss, January 23, 1996 (Inception) to December 31, 1996 - - - - (3,803) (3,803) ------------------------------------------------------------------------------------- Balance, December 31, 1996 600,000 600 5,400 - (3,803) 2,197 Issuance of Common Stock for cash 500,000 500 24,500 - - 25,000 Net loss - - - - (5,268) (5,268) ------------------------------------------------------------------------------------- Balance, December 31, 1997 1,100 000 1,100 29,900 - (9,071) 21,929 Effect of stock split 5,500,000 5,500 (5,500) - - - Net loss - - - - (3,477) (3,477) ------------------------------------------------------------------------------------- Balance, December 31, 1998 6,600,000 6,600 24,400 - (12,548) 18,452 Effect of stock split 13,556,400 13,556 (13,556) - - - Net loss - - - - (18,452) (18,452) ------------------------------------------------------------------------------------- Balance, December 31, 1999 20,156,400 20,156 10,844 - (31,000) - Sale of common stock in private placement, net of issuance costs of $1,000,000 3,464,547 3,465 23,246,535 - - 23,250,000 Common stock issued and options and warrants exchanged in connection with FED acquisition 10,486,386 10,486 92,354,461 - - 92,364,947 Cancellation of existing shareholders common stock (9,356,018)) (9,356) 9,356 - - - Issuance of common stock related to exercise of warrant 1,080 1 1,835 - - 1,836 Issuance of common stock for services 316,748 317 2,216,919 - - 2,217,236 Deferred compensation - - - (13,023,364) - (13,023,364) Amortization of deferred compensation - - - 2,539,828 - 2,539,828 Reversal of deferred compensation balance for forfeited stock options - - (1,217,139) 1,217,139 - - Net Loss - - - - (48,166,817) (48,166,817) ------------------------------------------------------------------------------------- Balance, December 31, 2000 25,069,143 $25,069 $116,622,811 $(9,266,397) $(48,197,817) $59,183,666 ========== ======= ============ ============ ============= ===========
The accompanying notes are an integral part of these consolidated statements. 52 eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.) (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from inception (January 23, 1996) to December 31, 2000
Period from Inception (January 23, 1996) to December 31, 2000 1999 1998 2000 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ........................ $(48,166,817) $ (18,452) $ (3,477) $(48,197,817) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ... 21,488,686 $ 94 587 21,489,521 Loss on sale of assets .......... 98,548 2,103 -- 97,713 Non-cash charge for stock based compensation ................ 2,539,828 -- -- 2,539,828 Acquired in-process research and development ................. 12,820,000 -- -- 12,820,000 Changes in operating assets and liabilities: Contract receivables ............ (693,770) -- -- (693,770) Costs and estimated profits in excess of billings on contracts in progress ....... (7,783) -- -- (7,783) Prepaid expenses and other current assets .............. (359,506) -- -- (359,506) Deposits and other assets ....... (94,943) -- -- (94,943) Advanced payment on contracts to be completed ................ 311,812 -- -- 311,812 Current portion long term debt .. -- -- -- -- A/P, accrued expenses and other current liabilities ......... 51,039 -- -- 51,039 ------------ ------------ ------------ ------------ Net cash used in operating activities .................. (12,012,906) (16,255) (2,890) (12,043,906) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment .......... (803,033) -- -- (803,033) Net cash acquired in acquistion . 1,239,162 -- -- 1,239,162 ------------ ------------ ------------ ------------ Net cash provided by investing activities .................. 436,129 -- -- 436,129 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated statements. 53 eMAGIN CORPORATION (formerly FASHION DYNAMICS CORP.) (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 and for the period from inception (January 23, 1996) to December 31, 2000
Period from Inception (January 23, 1996) to December 2000 1999 1998 31, 2000 ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common stock, net of issuance costs 21,250,000 -- -- 21,281,000 Re-payments of bridge loan and obligations under capital lease ....................... (2,305,966) -- -- (2,305,966) ------------ ------------ ------------ ------------ Net cash provided by financing activities .................. 18,944,034 -- -- 18,975,034 ------------ ------------ ------------ ------------ Net increase/(decrease) in cash and cash equivalents ........ 7,367,257 (16,255) (2,890) 7,367,257 CASH AND CASH EQUIVALENTS, beginning of period ......... -- 16,255 19,145 -- ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period ...................... $ 7,367,257 $ -- $ 16,255 $ 7,367,257 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ................... $ 244,208 $ -- $ -- $ -- ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of business: Total purchase price ............ $ 98,465,622 $ -- $ -- Fair value of assets, net of cash acquired .................... 38,807,454 -- Net liabilities assumed ......... 3,816,747 -- -- Excess purchase price over net assets acquired ............. 54,602,259 -- -- ------------ ------------ ------------ Net cash acquired in acquisition $ 1,239,162 $ -- $ -- ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 54 eMAGIN CORPORATION (Formerly Fashion Dynamics Corp.) Notes to the Consolidated Financial Statements Note 1 - NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the laws of the State of Nevada. FDC had no active business operations other than to acquire an interest in a business. On March 16, 2000, FDC acquired FED Corporation (the Merger). FED was a developer and manufacturer of optical systems and micro displays for use in the electronics industry. FED's wholly owned subsidiary, Virtual Vision, develops and markets micro display systems and optics technology for commercial, industrial and military applications. The merged company changed its name to eMagin Corporation (the Company or eMagin) (Note 2). Following the Merger, the business conducted by the Company is the business conducted by FED prior to the Merger. The Company continues to be a development stage company, as defined by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises", as it continues to devote substantially all of its efforts to establishing a new business, and it has not yet commenced its planned principal operations. Revenues earned by the Company to date are primarily related to research and development type contracts and are not related to the Company's planned principal operations of commercialization of products using organic light emitting diode (OLED) technology. Since its inception, FED Corporation entered into research and development cost-sharing arrangements, as well as research and development contracts, with several government agencies and private industry. To date, such arrangements have provided total funding of approximately $36.6 million, including $32.6 million by FED prior to the Merger, through cost sharing and contract revenues. Certain of these arrangements continue through 2001 and may provide for approximately $9.3 million of additional funding. Such funding is subject to, among other factors, satisfactory progress on projects and available government funding. Through December 31, 2000, the Company had incurred development stage losses totaling approximately $48.2 million. Prior to the acquisition of FED by FDC, FED incurred developmental stage losses totaling approximately $52.5 million. At December 31, 2000, the Company had approximately $8.2 million of cash, cash equivalents and contract receivables to fund short-term working capital requirements. At February 28, 2001, such amounts totaled approximately $4.6 million. The Company's ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near future to continue: (1) its research and development efforts, (2) hiring and retaining key employees, (3) satisfaction of its commitments and (4) the successful development and marketing of its products. The Company believes that it will be able to secure financing in the near term and that the proceeds from such financings, along with its remaining cash resources at December 31, 2000, will be sufficient to fund the Company's operations into the first quarter of 2002 and beyond. However, there can be no assurance that sufficient capital will be available, when required, to permit the Company to realize its plan, or even if such capital is available, that it will be at terms favorable to the Company. Additionally, there can be no assurance that the Company's efforts to produce a commercially viable product will be successful, or that the Company will generate sufficient revenues to provide positive cash flows from operations. 55 These and other factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue in existence. Note 2 - FED ACQUISITION On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the terms of the agreement, FDC issued approximately 10.5 million shares of its common stock to FED shareholders, and issued approximately 3.9 million options and warrants in exchange for existing FED options and warrants. The total purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of the simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged, based on the difference between the fair value and the exercise price of said equity instruments and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows: $13 million to deferred compensation for the portion of value of options and warrants exchanged relating to unvested securities, $18.0 million to identifiable intangible assets as valued by an independent appraisal, and $54.6 million to goodwill. Such goodwill is being amortized over a three year period. The Company recorded approximately $20.9 million in amortization expense related to purchased intangible assets for the year ended December 31, 2000. In accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs", as clarified by Financial Accounting Standards Board Interpretation No. 4, amounts assigned to in-process research and development will be charged to expense as part of the allocation of purchase price. Accordingly, the Company recognized a charge of approximately $12.8 million associated with the write-off of acquired in-process research and technology, which is included in the accompanying statements of operations for the year ended December 31, 2000. The following information reflects pro forma statements of operations data for the years ended December 31, 2000 and 1999, assuming the acquisition of FED occurred at the beginning of each year presented: Year Ended December 31 ---------------------- 2000 (unaudited) 1999 ---- ---- Revenues $3,126,000 $1,895,000 Net loss $(65,305,000) $(32,294,000) Net loss per share $(2.95) $(1.25) These pro forma results have been presented for comparative purposes only and do not purport to be indicative of the results that would have actually resulted had the acquisition occurred at the beginning of the years presented. Note 3 - SIGNIFICANT ACCOUNTING POLICIES Revenue and Cost Recognition The Company has historically earned revenues from certain of its research and development activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contract,. Revenues relating to firm fixed-price contracts are generally recognized on the percentage-of-completion 56 method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. As of December 31, 2000, the Company had received advance payments on contracts to be completed of $311,812. Through December 31, 2000, the Company has recognized revenues of approximately $450,000 under this agreement in the accompanying consolidated financial statements. Costs and Estimated Profits in Excess of Billings on Contracts in Progress The Company records costs and estimated profits in excess of billings on contracts in progress as an asset on its balance sheet to the extent such costs, and related profits, if any, have been incurred under outstanding contracts and are expected to be collected. The components of costs and estimated profits in excess of billings on contracts in progress as of December 31, 2000 were as follows: 2000 --------------- Total costs incurred and estimated profits $ 3,408,000 Less amounts billed 2,781,000 --------------- Costs and estimated profits in excess of billings on contracts in progress $ 627,000 =============== Research and Development/Cost Sharing Arrangements To date, activities of the Company include the performance of research and development under cooperative agreements with United States Government agencies. Current industry practices provide that costs and related funding under such agreements be accounted for as incurred and earned. The Company has entered into three cost sharing arrangements with an agency of the U.S. Government and two commercial customers. The Company has incurred research and development costs and earned funding under these agreements as of December 31, 2000 as follows: 2000 -------------- Unfunded research and development $ 8,053,000 Research and development costs 2,909,000 Funding received (1,328,000) -------------- $ 9,634,000 ============== The Company may incur approximately $3,396,000 of additional costs on these efforts. If such costs, as defined, are incurred, the government is obligated to reimburse the Company $1,439,000 of such amounts. 57 Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight commercial paper and are stated at cost, which approximates market, and are considered available for sale. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", requires the classification of debt and equity securities based on whether the securities will be held to maturity, are considered trading securities or are available-for-sale. Classification within these categories may require the securities to be reported at their fair market value with unrealized gains and losses included either in current earnings or reported as a separate component of shareholders' equity, depending on the ultimate classification. Comprehensive Income The Company complies with the provisions of SFAS No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains or losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income must be reported on the face of the annual financial statements. The Company's operations did not give rise to any material items includable in comprehensive income, which were not already in net income for the years ended December 31, 2000, 1999 and 1998. Accordingly, the Company's comprehensive income is the same as its net income or loss for all periods presented. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation on equipment is calculated using the straight-line method of depreciation over their estimated useful lives. Amortization of leasehold improvements is calculated by using the straight-line method over the shorter of their estimated useful lives or lease terms. Expenditures for maintenance and repairs are charged to expense as incurred. Goodwill and Other Intangible Assets Identifiable intangible assets resulting from the acquisition of FED and the excess purchase price over net assets acquired ("goodwill") are being amortized on a straight-line basis over their respective estimated useful lives of approximately three years. As of December 31, 2000, goodwill and other intangible assets were comprised of the following (in millions): Goodwill $54.6 Purchased identifiable intangibles 18.0 Less: Accumulated amortization 20.9 ----- Goodwill and other intangible assets, net $51.7 ===== The Company recorded approximately $20.9 million in amortization expense related to purchased intangible assets for the year ended December 31, 2000. 58 Long-Lived Assets SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed", establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. SFAS No. 121 requires, among other things, that assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be realizable considering, among other factors, expected future undiscounted operating cash flows of the related asset. Income Taxes Deferred income taxes are recorded by applying enacted statutory tax rates to temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. At December 31, 2000 and 1999, the Company has net deferred tax assets of approximately $19.8 million and $14.3 million respectively, primarily resulting from the future tax benefit of net operating loss carry forwards discussed below. Such net deferred tax assets are fully offset by valuation allowances because of the uncertainty as to their future to be realized. At December 31, 2000, the Company has net operating loss carry forwards totaling approximately $49.7 million, inclusive of the net operating losses acquired as a result of the acquisition of FED, which expire through 2020, available to offset future federal taxable income. Pursuant to Section 382 of the Internal Revenue Code, the usage of a portion of these net operating loss carry forwards is limited due to changes in ownership that have occurred. Principles of Consolidation The accompanying consolidated financial statements of eMagin Corporation include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control. Inter-company transactions and balances are eliminated. Loss per Common Share In accordance with SFAS No 128, net loss per common share amounts ("basic EPS") were computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Net loss per common share assuming dilution ("diluted EPS") were computed by reflecting potential dilution from the exercise of stock options and warrants. Common equivalent shares have been excluded from the computation of diluted EPS as their effect is antidilutive. Stock-Based Compensation The Company accounts for stock-based compensation issued to employees in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company, as permitted, elected not to adopt the financial reporting requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", for stock-based compensation granted to employees. Accordingly, the Company has disclosed in the notes to the financial statements the pro forma net loss for the periods presented as if the fair-value-based method was used in accordance with the provisions of SFAS No. 123. 59 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior-year amounts have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.138 "Accounting for Certain Derivative Instrument and Certain Hedging Activities," which amends the accounting and reporting standards of SFAS No. 133, "Accounting for Derivatives and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 2000 (as amended by SFAS No. 137) and will not require retroactive restatement of prior-period financial statements. Management believes the adoption of SFAS 133 will not have a material impact on the Company. In March 2000, the FASB issued interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving Stock Compensation-An Interpretation of APB Opinion No. 25." Among other things, FIN 44 clarifies the definition of employees, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain of its conclusions cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company adopted the provisions of FIN 44 as of July 1, 2000. Note 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements and their estimated lives are as follows at December 31, 2000 and 1999:
Useful Lives 2000 1999 --------------- -------------- ------------- Computer equipment and software 3 $ 230,000 $ -- Lab and factory equipment 3 1,230,000 -- Furniture, fixtures and office equipment 10 108,000 -- Leasehold improvements Life of lease 256,000 -- -------------- ------------- 1,824,000 -- -------------- ------------- Less- Accumulated depreciation and amortization 556,000 -- -------------- ------------- $ 1,268,000 $ -- ============== =============
Depreciation and amortization expense of equipment and leasehold improvements for the period December 31, 2000 was approximately $580,000. For the year ended December 31, 1999 these amounts were not material. 60 Additionally, from time to time, the Company makes deposits on certain equipment that may ultimately be purchased by a financing company and leased to the Company. Amounts paid by the Company for such deposits totaled approximately $403,000 at December 31, 2000. Note 5 - BRIDGE LOANS In September 1999, FED entered into two $1,000,000 convertible bridge loans for an aggregate of $2,000,000. Each loan bore interest at 8% and matured in June 2000. The loans were convertible at the option of the holder into shares of the Company's common stock at a purchase price equal to the per share value of the private placement completed in connection with the Merger. These liabilities were assumed by the Company in the Merger. The entire outstanding balance of the bridge loans, including accrued and unpaid interest was repaid in June 2000. Note 6 - LONG-TERM DEBT Long-term debt consists of the following as of December 31, 2000 and 1999: 2000 1999 -------------- -------------- Notes payable (a) $ 346,000 $ -- Capital leases (b) 40,000 -- Other long term debt 50,000 -- -------------- -------------- 436,000 Less- Current portion 313,000 -- -------------- -------------- $ 123,000 $ -- ============== ============== a. In May 1999, FED entered into a $625,000 three-year loan agreement collateralized by its fixed assets. Such liability was assumed in the Merger. The remaining principal balance is $221,870 at December 31, 2000 with payments due through 2002 at an interest rate of 13.88%. In June 1999, FED entered into a $155,000 five-year uncollateralized loan agreement. Such liability was assumed in the Merger. The proceeds were used to finance a leasehold improvement. The principal balance is $124,067 at December 31, 2000 with payments due through 2004 at an interest rate of 18%. b. The Company is party to a capital lease for certain equipment with aggregate remaining principal balance totaling $40,121 at December 31, 2000, excluding interest, due through 2003 at an interest rate of 7.27%. Maturity of debt for years ending December 31 are as follows: 2001 $ 313,000 2002 48,000 2003 49,000 2004 26,000 ------------ $ 436,000 =========== 61 Note 7 - SHAREHOLDERS' EQUITY The authorized common stock of the Company consists of 40,000,000 shares with a par value of $0.001 per share. On March 30, 1998 the Company forward split its common stock 6:1 increasing the number of issued and outstanding common shares from 1,100,000 to 6,600,000. On December 31, 1999 the Company forward split its common stock 3.054:1, increasing the number of issued and outstanding common stock from 6,600,000 to 20,156,400. Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3 million were raised through the private placement issuance of approximately 3.5 million shares of common stock. Additionally, approximately 9.4 million shares of common stock held by FDC's principal shareholders were cancelled at the time of the Merger. On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the terms of the agreement, FDC issued approximately 10.5 million shares of its common stock to FED shareholders, and issued approximately 3.9 million options and warrants in exchange for existing FED options and warrants. The total purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of the simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged, based on the difference between the fair value and the exercise price of said equity instruments and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows: $13 million to deferred compensation for the portion of value of options and warrants exchanged relating to unvested securities, $18.0 million to identifiable intangible assets as valued by an independent appraisal, and $54.6 million to goodwill. Such goodwill is being amortized over a three year period. The Company recorded approximately $20.9 million in amortization expense related to purchased intangible assets for the year ended December 31, 2000. In accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs", as clarified by Financial Accounting Standards Board Interpretation No. 4, amounts assigned to in-process research and development will be charged to expense as part of the allocation of purchase price. Accordingly, the Company recognized a charge of approximately $12.8 million associated with the write-off of acquired in-process research and technology, which is included in the accompanying statements of operations for the year ended December 31, 2000. Note 8 - STOCK-BASED COMPENSATION PLANS Stock Option Plan In 1994, FED established the 1994 Stock Plan (the "1994 Plan"), which has been assumed by the Company. The plan provided for the granting of options to purchase an aggregate of 1,286,000 shares of the Common Stock to employees and consultants of FED Corporation. In 2000, FED established the 2000 Stock Option Plan (the "2000 Plan"), which has been assumed by the Company. An aggregate 3,900,000 shares of the Company's common stock are reserved for issuance under the 2000 Plan. The Plan permits the granting of options and stock purchase rights to employees and consultants of the Company. The 2000 Plan allows for the grant of incentive stock options meeting 62 the requirements of Section 422 of the Internal Revenue Code of 1986 (the "Code") or non-statutory stock options which are not intended to meet the requirements Section 422 of the Code. Vesting terms of the options range from immediate vesting of all options to a ratable vesting period of 5-1/2 years. Option activity for the year ended December 31, 2000 is summarized as follows:
Weighted Average Shares Exercise Price ------------ -------------- Outstanding at December 31, 1999 -- $ -- Options assumed 3,342,832 2.01 Options granted, post-merger 329,200 9.30 Options exercised - - Options canceled (281,842) 1.77 ------------ Outstanding at December 31, 2000 3,390,190 2.72 =========== Exercisable at December 31, 2000 1,311,093 $2.36 =========== Weighted average fair value of options granted $ 2.72
At December 31, 2000, there were 1,257,296 shares available for grant under the 2000 Plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.48%; no expected dividend yield, expected lives of 1.6 years from date of vesting; and expected stock price volatility of .75. Exercise prices for outstanding options at December 31, 2000 range from $1.72 - $19.50. The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ------------------------------------------------------- --------------------------------------- Weighted Number Weighted Average Average Number Range of Exercise Outstanding at Remaining Exercise Exercisable at Weighted Average Prices December 31, 2000 Contractual Life Price December 31, 2000 Exercisable Price ----------------- ----------------- ---------------- ---------- ----------------- ----------------- $ 1.72 - $1.72 2,962,496 7.4 years $ 1.72 1,218,362 $ 1.72 5.25 - 10.50 361,530 8.87 years 9.09 49,115 9.50 11.06- 19.50 66,164 4.3 years 12.52 43,616 12.25 -------------- -------------- 3,390,190 1,311,093 ============== ==============
63 The Company has elected to continue to account for stock-based compensation under APB Opinion No. 25, under which no compensation expense has been recognized for stock options granted to employees at fair market value. Had compensation expense for stock options granted under the 2000 Plan and 1994 Plan been determined based on fair value at the grant dates, the Company's net loss and net loss per share for 2000 would have been increased to the pro forma amounts shown below. Net loss: 2000 -------------- As reported .................. $ (48,167,000) Pro forma..................... $ (49,470,000) Net loss per share: As reported .................. $ (2.18) Pro forma per share........... $ (2.23) For the years ended December 31, 1999 and 1998, pro forma net loss and net loss per share would have been the same as net loss and net loss per share. Warrants At December 31, 2000, warrants to purchase 800,260 shares of common stock are issued and outstanding at exercise prices ranging from $1.72 to $26.25. Note 9 - COMMITMENTS AND CONTINGENCIES Royalty Payments The Company is obligated to make minimum annual royalty payments to a corporation commencing January 1, 2001. Under this agreement, the Company must pay to the corporation the greater of a minimum royalty per year, or a certain percentage of net sales of certain products, which percentages are defined in the agreement with the corporation. The percentages are on a sliding scale depending on the amount of sales generated. Any minimum royalties paid may be credited against the amounts due based on the percentage of sales. License and Technology Agreement In March 1997, FED entered into a technology agreement with a corporation to permit potential commercialization of small-format OLED displays. This agreement was transferred to the Company in the Merger. The Company is dependent upon its license agreement with the corporation for the development and commercialization of its currently planned OLED products. Payments were made under evaluation and license agreements based on the achievement of certain milestones in phases of the agreements. No payments were required or made for the year ended December 31, 2000. Based on a remaining optional phase of the current agreement the Company may elect to make additional payments in 2001, if the optional phase of the agreement is pursued. 64 Operating Leases The Company leases certain office facilities and office, lab and factory equipment under operating leases expiring through January 2004. Certain leases provide for payments of monthly operating expenses. The approximate future minimum lease payments are as follows: Year ending December 31: 2001 $4,198,000 2002 2,585,000 2003 1,891,000 2004 383,000 ---------- $9,057,000 ========== For the year ended December 31, 2000, rent expense was approximately $2,251,000. Litigation The Company may, from time to time, be a party to litigation arising during the normal course of business. The Company is currently not a party to any litigation. 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of FED Corporation: We have audited the accompanying consolidated balance sheet of FED Corporation (a Delaware corporation in the development stage; see Note 1) and subsidiary as of December 31, 1999 and the related consolidated statements of operations and cash flows for the years ended December 31, 1999 and 1998 and for the period from inception (January 6, 1992) to December 31, 1999 and the consolidated statements of shareholders' equity for the period from inception (January 6, 1992) to December 31, 1992 and for each of the seven years ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FED Corporation and subsidiary as of December 31, 1999 and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 and for the period from inception (January 6, 1992) to December 31, 1999, in conformity with accounting principles generally accepted in the United States. New York, New York Arthur Andersen LLP February 14, 2000 (except for Note 3, as to which the date is March 15, 2000) 66 FED CORPORATION (PREDECESSOR) (a development stage company) CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999
ASSETS 1999 - ---------------------------------------------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 718,468 Contract receivables 73,304 Costs and estimated profits in excess of billings on contracts in progress 221,723 Prepaid expenses and other current assets 127,658 ---------------- Total current assets 1,141,153 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,214,680 GOODWILL, net 2,671,390 DEPOSITS AND OTHER ASSETS 10,451 ---------------- Total assets $ 5,037,674 ================ LIABILITIES AND SHAREHOLDERS' EQUITY - ---------------------------------------------------- CURRENT LIABILITIES: Accounts payable, deferred revenue, accrued expenses, and other current liabilities $ 2,041,100 Short-term debt 2,126,700 Current portion of long-term debt 268,675 --------------- Total current liabilities 4,436,475 --------------- LONG-TERM DEBT 541,578 --------------- COMMITMENTS (Note 10) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding -- Common stock, $.01 par value, 50,000,000 shares authorized, 4,380,589 shares issued and outstanding 43,806 Additional paid-in capital 47,254,459 Deficit accumulated during the development stage (47,238,644) --------------- Total shareholders' equity 59,621 --------------- Total liabilities and shareholders' equity $ 5,037,674 ===============
The accompanying notes are an integral part of this consolidated balance sheet. 67 FED CORPORATION (PREDECESSOR) (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 15, 2000, THE YEARS ENDED DECEMBER 31, 1999 AND 1998, AND THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1999
Period from Period From January 1, Inception 2000 to (January 6, March 15, Year Ended December 31, 1992) to 2000 ---------------------------- December 31, (unaudited) 1999 1998 1999 ------------ ------------ ------------ ------------ CONTRACT REVENUES .................... $ 568,484 $ 1,895,426 $ 6,154,123 $ 14,565,353 ------------ ------------ ------------ ------------ Total revenues ......... 568,484 1,895,426 6,154,123 14,565,353 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Research and development, net of funding under cost sharing arrangements of $175,000, $1,148,166, $1,263,448 and respectively .................. 2,180,519 10,171,387 10,250,010 36,323,800 General and administrative ....... 995,750 5,203,201 3,513,662 15,069,058 Non-cash stock based compensation 7,778,850 -- -- -- Non-cash charge for induced conversion of debt ............ -- 1,917,391 -- 1,917,391 ------------ ------------ ------------ ------------ Total costs and expenses, net 10,955,119 17,291,979 13,763,672 53,310,249 ------------ ------------ ------------ ------------ OTHER (EXPENSE): .................... (2,968,414) (403,692) (121,878) (403,102) ------------ ------------ ------------ ------------ Net loss ............... $(13,355,049) $(15,800,245) $ (7,731,427) $(39,147,998) ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 68 ====== FED CORPORATION AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1992 AND FOR EACH OF THE SEVEN YEARS ENDED DECEMBER 31, 1999
Series A Series B Series C Series D Series E Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock ------------------ ---------------- ---------------------- ------------------ ----------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, at inception (January 6, 1992) - $ - - $ - - $ - - $ - - $ - Sale of common stock to founder - - - - - - - - - - Sale of common stock to a trust controlled by founder - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1992 - - - - - - - - - - Sale of common stock to founder - - - - - - - - - - Sale of common stock to founder's family - - - - - - - - - - Repurchase of common stock from founder - - - - - - - - - - Sale of Series A preferred stock 2,000 20 - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1993 2,000 20 - - - - - - - - Sale of common stock to founder - - - - - - - - - - Sale of Series B preferred stock - - 10,154 102 - - - - - - Sales of common stock - - - - - - - - - - Sales of common stock to employees - - - - - - - - - - Sales of common stock to employees and ESPP - - - - - - - - - - Stock purchases receivable from employees - - - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1994 2,000 20 10,154 102 - - - - - - Sales of common stock, net of stock issuance costs - - - - - - - - - - Series F Series G Preferred Stock Preferred Stock Common Stock ------------------ ------------------ ---------------------- Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- BALANCE, at inception (January 6, 1992) - $ - - $ - - $ - Sale of common stock to founder - - - - 5,000,000 50,000 Sale of common stock to a trust controlled by founder - - - - 161,000 1,610 Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1992 - - - - 5,161,000 51,610 Sale of common stock to founder - - - - 76,000 760 Sale of common stock to founder's family - - - - 13,333 133 Repurchase of common stock from founder - - - - (1,600,000) (16,000) Sale of Series A preferred stock - - - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1993 - - - - 3,650,333 36,503 Sale of common stock to founder - - - - 100 1 Sale of Series B preferred stock - - - - - - Sales of common stock - - - - 1,047,132 10,471 Sales of common stock to employees - - - - 88,469 885 Sales of common stock to employees and ESPP - - - - 34,041 340 Stock purchases receivable from employees - - - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1994 - - - - 4,820,075 48,200 Sales of common stock, net of stock issuance costs - - - - 460,000 4,600 Accumulated Additional During the Paid-in Development Subscription Capital Stage Receivables Total ----------- ------------ ----------- ----------- BALANCE, at inception (January 6, 1992) $ - $ - $ - $ - Sale of common stock to founder (45,000) - - 5,000 Sale of common stock to a trust controlled by founder 119,140 - - 120,750 Net loss for the period - (59,116) - (59,116) ----------- ------------ ----------- ----------- BALANCE, December 31, 1992 74,140 (59,116) - 66,634 Sale of common stock to founder 61,490 - - 62,250 Sale of common stock to founder's family 19,867 - - 20,000 Repurchase of common stock from founder 14,400 - - (1,600) Sale of Series A preferred stock 199,980 - - 200,000 Dividends on Series A preferred stock - (3,750) - (3,750) Net loss for the period - (408,738) - (408,738) ----------- ------------ ----------- ----------- BALANCE, December 31, 1993 369,877 (471,604) - (65,204) Sale of common stock to founder - - - 1 Sale of Series B preferred stock 40,514 - - 40,616 Sales of common stock 1,591,786 - - 1,602,257 Sales of common stock to employees 133,110 - - 133,995 Sales of common stock to employees and ESPP 43,062 - - 43,402 Stock purchases receivable from employees - - (26,810) (26,810) Dividends on Series A preferred stock - (18,000) - (18,000) Net loss for the period - (1,404,862) - (1,404,862) ----------- ------------ ----------- ----------- BALANCE, December 31, 1994 2,178,349 (1,894,466) (26,810) 305,395 Sales of common stock, net of stock issuance costs 1,107,723 - - 1,112,323
69
Series A Series B Series C Series D Series E Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock ------------------ ---------------- ---------------------- ------------------ ----------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- Common stock issued to Director as finder's fee - - - - - - - - - - Sales of common stock to employees and ESPP - - - - - - - - - - Receipt of stock purchases receivable from employees - - - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1995 2,000 20 10,154 102 - - - - - - Conversion of Series A preferred stock 131,333 1,313 - - - - - - - - Common stock issued as finder's fee - - - - - - - - - - Sale of common stock to employees and ESPP - - - - - - - - - - Exercise of stock options - - - - - - - - - - Sale of Series B preferred stock - - 1,562 16 - - - - - - Sale of Series C preferred stock - - - - 1,156,832 11,568 - - - - Sale of Series D preferred stock - - - - - - 887,304 8,873 - - Sale of Series E preferred stock - - - - - - - - 874,093 8,741 Costs of private placement of preferred stock - - - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1996 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741 Series F Series G Preferred Stock Preferred Stock Common Stock ------------------ ------------------ ---------------------- Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- Common stock issued to Director as finder's fee - - - - 61,560 616 Sales of common stock to employees and ESPP - - - - 33,295 333 Receipt of stock purchases receivable from employees - - - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1995 - - - - 5,374,930 53,749 Conversion of Series A preferred stock - - - - - - Common stock issued as finder's fee - - - - 11,500 115 Sale of common stock to employees and ESPP - - - - 42,447 424 Exercise of stock options - - - - 3,125 31 Sale of Series B preferred stock - - - - - - Sale of Series C preferred stock - - - - - - Sale of Series D preferred stock - - - - - - Sale of Series E preferred stock - - - - - - Costs of private placement of preferred stock - - - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1996 - - - - 5,432,002 54,319 Accumulated Additional During the Paid-in Development Subscription Capital Stage Receivables Total ----------- ------------ ----------- ----------- Common stock issued to Director as finder's fee 153,284 - - 153,900 Sales of common stock to employees and ESPP 70,420 - - 70,753 Receipt of stock purchases receivable from employees - - 26,810 26,810 Dividends on Series A preferred stock - (18,000) - (18,000) Net loss for the period - (3,992,375) - (3,992,375) ----------- ------------ ----------- ----------- BALANCE, December 31, 1995 3,509,776 (5,904,841) - (2,341,194) Conversion of Series A preferred stock (1,313) - - - Common stock issued as finder's fee (115) - - - Sale of common stock to employees and ESPP 105,249 - - 105,673 Exercise of stock options 4,656 - - 4,687 Sale of Series B preferred stock 6,234 - - 6,250 Sale of Series C preferred stock 4,037,344 - - 4,048,912 Sale of Series D preferred stock 4,427,646 - - 4,436,519 Sale of Series E preferred stock 5,235,817 - - 5,244,558 Costs of private placement of preferred stock (747,292) - - (747,292) Dividends on Series A preferred stock - (18,000) - (18,000) Net loss for the period - (6,021,867) - (6,021,867) ----------- ------------ ----------- ----------- BALANCE, December 31, 1996 16,578,002 (11,944,708) - 4,718,246
70 FED CORPORATION AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1992 AND FOR EACH OF THE SEVEN YEARS ENDED DECEMBER 31, 1999
Series A Series B Series C Series D Series E Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock ------------------ ---------------- ---------------------- ------------------ ----------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1996 133,333 $1,333 11,716 $ 118 1,156,832 $ 11,568 887,304 $ 8,873 874,093 $ 8,741 Sale of common stock to employees and ESPP - - - - - - - - - - Costs of private placement of preferred stock - - - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1997 133,333 1,333 11,716 118 1,156,832 11,568 887,304 8,873 874,093 8,741 Sale of common stock to employees and ESPP - - - - - - - - - - Exercise of stock options - - - - - - - - - - Sale of Series B preferred stock - - 2,778 28 - - - - - - Sale of Series F preferred stock - - - - - - - - - - Costs of private placement of preferred stock - - - - - - - - - - Dividends on Series A preferred stock - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1998 133,333 1,333 14,494 146 1,156,832 11,568 887,304 8,873 874,093 8,741 Sale of Series G preferred stock and resulting accretion to liquidation value - - - - - - - - - - Series F Series G Preferred Stock Preferred Stock Common Stock ------------------ ------------------ ---------------------- Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- ables BALANCE, December 31, 1996 - $ - - $ - 5,432,002 $ 54,319 Sale of common stock to employees and ESPP - - - - 12,728 128 Costs of private placement of preferred stock - - - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1997 - - - - 5,444,730 54,447 Sale of common stock to employees and ESPP - - - - 8,396 84 Exercise of stock options - - - - 5,000 50 Sale of Series B preferred stock - - - - - - Sale of Series F preferred stock 1,915,471 19,155 - - - - Costs of private placement of preferred stock 7,300 73 - - - - Dividends on Series A preferred stock - - - - - - Net loss for the period - - - - - - -------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1998 1,922,771 19,228 - - 5,458,126 54,581 Sale of Series G preferred stock and resulting accretion to liquidation value - - 681,446 6,814 - - Accumulated Additional During the Paid-in Development Subscription Capital Stage Receivables Total ----------- ------------ ----------- ----------- BALANCE, December 31, 1996 $16,578,002 $(11,944,708) - $ 4,718,246 Sale of common stock to employees and ESPP 53,246 - - 53,374 Costs of private placement of preferred stock (7,830) - - (7,830) Dividends on Series A preferred stock - (18,000) - (18,000) Net loss for the period - (3,729,568) - (3,729,568) ----------- ------------ ----------- ----------- BALANCE, December 31, 1997 16,623,418 (15,692,276) - 1,016,222 Sale of common stock to employees and ESPP 38,311 - - 38,395 Exercise of stock options 12,450 - - 12,500 Sale of Series B preferred stock 16,638 - - 16,666 Sale of Series F preferred stock 11,473,671 - - 11,492,826 Costs of private placement of preferred stock (134,538) - - (134,465) Dividends on Series A preferred stock - (18,000) - (18,000) Net loss for the period (7,731,427) - (7,731,427) ----------- ------------ ----------- ----------- BALANCE, December 31, 1998 28,029,950 (23,441,703) - 4,692,717 Sale of Series G preferred stock and resulting accretion to liquidation value 4,702,817 (957,185) - 3,752,446
71 FED CORPORATION AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1992 AND FOR EACH OF THE SEVEN YEARS ENDED DECEMBER 31, 1999
Series A Series B Series C Series D Series E Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock ------------------ ---------------- ---------------------- ------------------ ----------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- Dividend on Series A preferred stock - - - - - - - - - - Induced conversion of preferred stock and debt to common stock (133,333) (1,333) (14,494) (146) (1,156,832) (11,568) (887,304) (8,873) (874,093) (8,741) Sale of common stock to employees and ESPP - - - - - - - - - - Common stock options and warrants issued to nonemployees - - - - - - - - - - Beneficial conversion features upon conversion of debt - - - - - - - - - - Stock split (Note 8) - - - - - - - - - - Net loss for the period - - - - - - - - - - -------- ------- ------- ------- ----------- -------- --------- ------- -------- ------- BALANCE, December 31, 1999 - $ - - $ - - $ - - $ - - $ - ======== ======= ======= ======= =========== ======== ========= ======= ======== ======= Series F Series G Preferred Stock Preferred Stock Common Stock ---------------------- ------------------- ----------------------- Shares Amount Shares Amount Shares Amount -------- -------- -------- -------- ----------- --------- Dividend on Series A preferred stock - - - - - - Induced conversion of preferred stock and debt to common stock (1,922,771) (19,228) (681,446) (6,814) 25,197,312 251,973 Sale of common stock to employees and ESPP - - - - 8,326 83 Common stock options and warrants issued to nonemployees - - - - - - Beneficial conversion features upon conversion of debt - - - - - - Stock split (Note 8) - - - - (26,283,178) (262,831) Net loss for the period - - - - - - ---------- ------- ------- ------- ----------- -------- BALANCE, December 31, 1999 - $ - - $ - 4,380,589 $ 43,806 ========== ======= ======= ======= =========== ======== Accumulated Additional During the Paid-in Development Subscription Capital Stage Receivables Total ----------- ------------ ------------ ----------- Dividend on Series A preferred stock - (9,000) - (9,000) Induced conversion of preferred stock and debt to common stock 12,676,004 (7,030,511) - 5,840,763 Sale of common stock to employees and ESPP 15,524 - - 15,607 Common stock options and warrants issued to nonemployees 234,000 - - 234,000 Beneficial conversion features upon conversion of debt 1,333,333 - - 1,333,333 Stock split (Note 8) 262,831 - - - Net loss for the period - (15,800,245) - (15,800,245) ----------- ------------ ----------- ----------- BALANCE, December 31, 1999 $47,254,459 $(47,238,644) $ - $ 59,621 =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated statements. 72 FED CORPORATION (PREDECESSOR) (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 2000 TO MARCH 15, 2000, THE YEARS ENDED DECEMBER 31, 1999, 1998 AND FOR THE PERIOD FROM INCEPTION (JANUARY 6, 1992) TO DECEMBER 31, 1999
Period from Period From January 1, Inception 2000 to (January 6, March 15, Year Ended December 31, 1992) to 2000 ----------------------------- December 31, (unaudited) 1999 1998 1999 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,355,049) $(15,800,245) $ (7,731,427) $(39,147,998) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 325,095 1,625,081 1,652,715 4,804,920 Deferred rent -- -- (167,446) -- Gain on sale of assets -- -- -- (69,525) Noncash charge for induced conversion of debt -- 1,917,391 -- 1,917,391 Noncash charges for value of warrants granted and amortization of original issue discount -- 203,000 -- 203,000 Noncash charge due to beneficial conversion feature -- 157,500 -- 157,500 Noncash charge for stock based compensation 7,778,850 -- -- -- Amortization of debt discount 2,940,339 -- -- -- Changes in operating assets and liabilities: Contract receivables (58,659) 188,755 1,723,189 (73,304) Costs and estimated profits in excess of billings on contracts in progress (397,841) 3,069,008 (3,220,079) (221,723) Prepaid expenses and other current assets (178,058) 129,840 214,738 140,779 Deposits and other assets -- 23,871 628,756 23,871 Accounts payable, accrued expenses, and other current liabilities 488,516 131,112 333,264 2,110,597 Advance payments on contracts to be completed -- (246,518) 246,518 -- ------------ ------------ ------------ ------------ Net cash used in operating activities (2,456,807) (8,601,205) (6,319,772) (30,154,492) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment (57,574) (250,193) (688,042) (3,154,640) Acquisition of business, net of cash acquired -- -- (547,503) (547,503) Proceeds from the sale of assets -- -- -- 229,550 ------------ ------------ ------------ ------------ Net cash used in investing activities (57,574) (250,193) (1,235,545) (3,472,593) ------------ ------------ ------------ ------------
73
Period from Period From January 1, Inception 2000 to (January 6, March 15, Year Ended December 31, 1992) to 2000 ----------------------------- December 31, (unaudited) 1999 1998 1999 ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from senior notes, net of issuance costs -- -- -- 3,968,958 Proceeds from short-term debt -- 3,333,333 -- 3,333,333 Proceeds from notes payable -- 590,232 -- 590,232 Proceeds from sales of common stock, net of issuance costs 1,269,378 15,608 40,208 3,419,160 Proceeds from sales of preferred stock, net of issuance costs -- 3,752,407 6,875,028 23,856,998 Proceeds from short-term debt 1,923,300 -- -- -- Payments of obligations under capital lease (92,748) -- -- (823,128) ------------ ------------ ------------ ------------ Net cash provided by financing activities 3,099,930 7,691,580 6,915,236 34,345,553 ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents 585,549 (1,159,818) (640,081) 718,468 CASH AND CASH EQUIVALENTS, beginning of period 718,468 1,878,286 2,518,367 -- ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 1,304,017 $ 718,468 $ 1,878,286 $ 718,468 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 11,918 $ 242,000 $ 200,000 $ 930,593 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of preferred stock to common stock $ -- $ 7,576,862 $ -- $ -- ============ ============ ============ ============ Conversion of senior debt to common stock $ -- $ 4,000,000 $ -- $ -- ============ ============ ============ ============ Acquisition of business- Fair value of assets acquired, net of cash acquired -- -- $ 978,399 -- Net book value assumed -- -- (165,163) -- Excess purchase price over net assets acquired -- -- 4,234,267 -- Value of preferred stock issued -- -- (4,500,000) -- ------------ ------------ ------------ ------------ Net cash paid for acquisition -- $ -- $ 547,503 $ -- ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 74 1. NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS FED Corporation ("FED", together with its subsidiary the "Company") was formed on January 6, 1992, to develop, manufacture and market field emitter devices or flat panel displays. In January 1994, the Company moved its principal office from North Carolina to New York State. In connection with this move, a Delaware corporation was established and the North Carolina Corporation was statutorily merged into the Delaware corporation with the latter being the survivor. During 1998, FED acquired Virtual Vision, Inc. ("Virtual Vision," or the "Subsidiary"), a head-mounted display technology company. Virtual Vision develops and markets head-mounted display systems for standalone and wireless computing in commercial, industrial, and military applications. The Company continues to be a development stage company, as defined by Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises", as it continues to devote substantially all of its efforts to establishing a new business, and it has not yet commenced its planned principal operations. Revenues earned by the Company to date are primarily related to research and development type contracts and are not related to the Company's planned principal operations of the commercialization of products using OLED technology. Since inception, the Company has entered into research and development cost-sharing arrangements, as well as research and development contracts, with several government agencies and private industry. Through December 31, 1999, such arrangements have provided total funding of approximately $32.6 million through cost sharing arrangements and contract revenues. Through December 31, 1999, the Company had incurred development stage losses totaling approximately $39 million, and at December 31, 1999, had a working capital deficit of $3.3 million. The Company's future success is dependent upon its ability to continue to raise capital for, among other things, (1) its research and development efforts, (2) hiring and retaining key employees, (3) satisfaction of its commitments and (4) the successful development and marketing of its products. 2. SIGNIFICANT ACCOUNTING POLICIES Revenue and Cost Recognition The Company has historically earned revenues from certain of its research and development activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract. Costs and Estimated Profits in Excess of Billings on Contracts in Progress The Company records costs and estimated profits in excess of billings on contracts in progress as an asset on its balance sheet to the extent such costs, and related profits, if any, have been incurred under outstanding contracts and are expected to be collected. 75 The components of costs and estimated profits in excess of billings on contracts in progress as of December 31, 1999 were as follows: 1999 ------------- Total costs incurred and estimated profits $ 1,216,000 Less amounts billed 994,000 ------------- Costs and estimated profits in excess of billings on contracts in progress ------------- $ 222,000 ============= Research and Development/Cost Sharing Arrangements To date, activities of the Company include the performance of research and development under cooperative agreements with United States Government agencies. Current industry practices provide that costs and related funding under such agreements be accounted for as incurred and earned. The Company has entered into three cost sharing arrangements with an agency of the U.S. Government. The Company has incurred research and development costs and earned funding under these agreements as follows:
1999 1998 ----------- ----------- Unfunded research and development $ 8,997,000 $ 8,726,000 Research and development costs 2,322,000 2,787,000 Funding received (1,148,000) (1,263,000) ----------- ----------- $10,171,000 $10,250,000 =========== ===========
Although it is not under any obligation, the Company may incur approximately $6,700,000 of additional costs on these efforts. If such costs, as defined, are incurred, the government is obligated to reimburse the Company for $3,326,000 of such costs. Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight commercial paper and are stated at cost, which approximates market, and are considered available for sale. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires the classification of debt and equity securities based on whether the securities will be held to maturity, are considered trading securities or are available-for-sale. Classification within these categories may require the securities to be reported at their fair market value with unrealized gains and losses included either in current earnings or reported as a separate component of shareholders' equity, depending on the ultimate classification. Comprehensive Income The Company complies with the provisions of SFAS No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains or losses on securities classified as available-for-sale, 76 foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive and other comprehensive income must be reported on the face of annual financial statements. The Company's operations did not give rise to any material items includable in comprehensive income which were not already in net income for the years ended December 31, 1999 and 1998. Accordingly, the Company's comprehensive income is the same as its net income for all period presented. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation on equipment is calculated using the straight-line method of depreciation over their estimated useful lives. Amortization of leasehold improvements is calculated by using the straight-line method over the shorter of their estimated useful lives or lease terms. Expenditures for maintenance and repairs are charged to expense as incurred. Goodwill Excess purchase price over net assets acquired ("goodwill") is amortized on a straight-line basis over the estimated period of benefit of the business acquired. Goodwill related to the acquisition of Virtual Vision of approximately $4,110,000, net of accumulated amortization of $1,439,000 at December 31, 1999, is being amortized over a period of five years. Long-Lived Assets SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed," establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. SFAS No. 121 requires, among other things, that assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be realizable considering, among other factors, expected future undiscounted operating cash flows of the related asset. Income Taxes Deferred income taxes are recorded by applying enacted statutory tax rates to temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. At December 31, 1999, the Company has net deferred tax assets of approximately $14.3 million, primarily resulting from the future tax benefit of net operating loss carryforwards discussed below. Such net deferred tax assets are fully offset by valuation allowances because of the uncertainty as to their future to be realized. At December 31, 1999, the Company has net operating loss carryforwards of approximately $35.8 million, which expire through 2019, available to offset future taxable income. Pursuant to Section 382 of the Internal Revenue Code, the usage of a portion of these net operating loss carryforwards is limited due to changes in ownership that have occurred. Additionally, the transaction discussed in Note 3, will result in a further limitation of the use of such net operating loss carryforwards. Stock-Based Compensation The Company accounts for stock-based compensation issued to employees in accordance with Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees." The Company, as permitted, elected not to adopt the financial reporting requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," for stock-based compensation granted to 77 employees. Accordingly, the Company has disclosed in the notes to the financial statements the pro forma net loss for the periods presented as if the fair-value-based method was used in accordance with the provisions of SFAS No. 123. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior-year amounts have been reclassified to conform with the current year presentation. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Boards issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability and be measured at its fair value. Additionally, any changes in the derivative's fair value are to be recognized currently in earnings, unless specific hedge accounting criteria are met. This statement is effective for fiscal years beginning after June 15, 2000. The Company does not believe that adoption of this statement will have a material impact on its consolidated financial statements. 3. ACQUISITION On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the terms of the merger, FDC issued approximately 10.5 million shares of its common stock to FED shareholders and issued approximately 3.9 million options and warrants in exchange for existing FED options and warrants. The total purchase price of the transaction was approximately $98.5 million, including $73.4 million of value relating to the shares issued (at a fair value of $7 per share, the value of a simultaneous private placement transaction of similar securities), $20.9 million of value relating to the options and warrants exchanged, based on the difference between the fair value and the exercise price of said equity instruments, and $3.8 million of assumed liabilities. The transaction was accounted for using the purchase method of accounting. 4. ACQUISITION OF VIRTUAL VISION In March 1998, the Company acquired all of the outstanding stock of Virtual Vision for a total purchase price of $5,000,000, consisting of $500,000 in cash and 750,000 shares of the Company's Series F Preferred Stock valued at $6.00 per share. The acquisition was accounted for under the purchase method of accounting and the results of operations of Virtual Vision have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated based on the fair value of the assets acquired, determined by management's estimates, as supported by appraisal. Purchase price in excess of net assets acquired of approximately $4.1 million resulted in the acquisition, which is being amortized over a period of five years. Pro forma results of operations for the periods prior to the 78 acquisition are not materially different than the accompanying historical statements of operations presented for the Company. 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements and their estimated lives are as follows at December 31, 1999:
Useful Lives 1999 -------------- -------------- Computer equipment and software 3 $ 558,000 Lab and factory equipment 3 3,142,000 Furniture, fixtures and office equipment 10 149,000 Leasehold improvements Life of lease 669,000 -------------- 4,518,000 Less- Accumulated depreciation and amortization (3,304,000) -------------- $ 1,214,000 ==============
Depreciation and amortization expense of equipment and leasehold improvements for the years ended December 31, 1999 and 1998 amounted to approximately $810,000 and $1,026,000 respectively. Additionally, from time to time, the Company makes deposits on certain equipment that may ultimately be purchased by a financing company and leased to the Company. Amounts paid by the Company for such deposits totaled approximately $14,000 for the year ended December 31, 1999. 6. DEBT Senior Notes Payable In April 1995, the Company completed a private placement for the issuance and sale of its 5% senior notes in the aggregate principal amount of $4,000,000, which was to mature in full on April 12, 2002, at an interest rate of 5% per annum payable quarterly. In July 1999, as part of the Company's recapitalization (Note 8), the note was converted into 5,072,464 shares of the Company's common stock. Under the original terms of the notes, the holders of the senior notes had the right to convert the unpaid principal balance, in multiples of $1,000, into common stock at the price of $3.45 per share at any time, subject to provision for anti-dilution. In order to induce the note-holders to convert such notes, the Company provided for a conversion rate of 4.375 shares of common stock, for each share of common stock otherwise provided for under the original conversion terms. The Company has recorded an expense of $1,917,000 in the accompanying statement of operations for the year ended December 31, 1999 as a result of the conversion, based on an estimated fair value of $3.40 per share, the value of a common share based on the Merger discussed in Note 3. Bridge Loans In September 1999, the Company entered into two $1,000,000 convertible loans for an aggregate of $2,000,000. Each loan bears interest at 8% and matures in June 2000. The loans are convertible at the option of the holder into shares of the Company's common stock at a purchase price equal to the per share value of the Company's most recent equity financing. In connection with these loans, the Company issued warrants for the purchase of 167,000 shares of the Company's common stock at an exercise price 79 of $12.00 per share. The intrinsic value of these warrants of $140,000 has been recorded as original issue discount, resulting in a reduction in the carrying value of this debt. The original issue discount will be amortized into interest expense over the period of the debt. In December 1999, the Company borrowed $1,333,333 from a corporation under the terms of a convertible note. The note was convertible into 392,157 shares of common stock under its original terms. The loan bears interest at 8% annually and matures in May 2000. In connection with the Merger discussed in Note 3, this note converted into common stock. Based on the terms of the merger the conversion terms of the debt provide for a beneficial conversion feature. The value of the beneficial feature is recorded as an offset to the debt account and will be amortized into interest expense over the original issuance term. At the merger date, the remaining discount will be amortized into interest expense. 7. LONG-TERM DEBT Long-term debt consists of the following as of December 31, 1999: 1999 -------------- Notes payable (a) $ 653,000 Liabilities assumed from Virtual Vision (b) 100,000 Capital leases (c) 57,000 -------------- 810,000 Less-Current portion 269,000 -------------- $ 541,000 ============== a. In May 1999, the Company entered into a $625,000 three-year loan agreement collateralized by its fixed assets. The aggregate remaining principal balance is $508,421 at December 31, 1999 and payments are due through 2002 at an interest rate of 13.88%. In June 1999, the Company entered into a $155,000 five-year uncollateralized loan agreement. The proceeds were used to finance a leasehold improvement. The aggregate principal balance is $144,964 at December 31, 1999 and payments are due through 2004 at an interest rate of 18%. b. In connection with the acquisition of Virtual Vision, the Company assumed a liability relating to a previous acquisition made by Virtual Vision. At December 31, 1999, the remaining payments under this agreement totaled $100,000, payable $50,000 per year for each of the next two years. This agreement also provides for additional payments over the $50,000 per year should certain technology acquired be used in consumer applications, whereby payments would be required based on certain percentages of licensing and sales revenues. c. The Company is party to a capital lease for certain equipment with aggregate remaining principal balance totaling $56,868 at December 31, 1999, excluding interest, due through 2003 at an interest rate of 7.27% 80 Maturity of debt as of December 31, 1999 is as follows: 2000 $ 269,000 2001 351,000 2002 115,000 2003 49,000 2004 26,000 ---------- $ 810,000 ========== 8. SHAREHOLDERS' EQUITY In March 2000, FED repriced approximately 325,000 common stock options issued to employees. The repricing resulted in a non-cash compensation expense of approximately $2.7 million for the period ended March 15, 2000. In addition, FED repriced approximately 108,000 warrants issued to outside consultants and organizations that provided bridge loans and funding commitments to the Company. The repricing resulted in a non-cash charge of approximately $1.2 million, which is included in the accompanying consolidated statement of operations for the Company period ended March 15, 2000. In March 2000, FED issued options to purchase common stock to employees at an exercise price below the fair market value on the date of grant of $7.00. These options vest over a period of 1 - 60 months with a minimum lockup period of 18 months. As a result, the Company recorded deferred compensation expense in the amount of approximately $12.5 million, which will be amortized over the vesting period of the options. FED also issued warrants to shareholders at an exercise price below the fair market value on the date of grant. As a result, FED recorded a one-time compensation expense of approximately $2.5 million for the period ended March 15, 2000. The recipients of the repriced options and warrants were required to execute lock-up agreements that prohibit disposition of the underlying shares for a period of 18 months following the Merger. Thereafter the recipients may transfer no more that 20% of the underlying shares in the 6 months following the end of the 18-month period, and the balance of the underlying shares may be transferred 24-27 months after the Merger. Common Stock In July 1999, the Company effected a 1 for 7 reverse stock split, resulting in a reduction of total common shares outstanding from approximately 30.7 million shares to approximately 4.4 million shares. During 1999, the Company amended its Certificate of Incorporation and was authorized to issue 50,000,000 shares of its Common Stock. Preferred Stock Through 1999, the Company's Certificate of Incorporation provided for the issuance of a total of 5,000,000 shares of preferred stock, which could be issued in various series. 81 Through 1998, the Company had issued an aggregate of 4,988,827 of Series A through F preferred stock. The various series generally provided for a liquidation preference equal to the original purchase price of the preferred stock, plus accrued but unpaid dividends, if declared, and were generally convertible at a rate of one share of preferred for one share of common, at the option of the holder. During 1999, the Company issued 681,446 shares of Series G preferred stock, generating aggregate proceeds of approximately $3,847,000. In connection with the issuance of the Series G preferred, the Company offered exchange credits whereby those purchasers of Series G preferred, also holders of preferred Series D, E and F, would exchange Series D, E and F preferred for upgrades to Series D1, E1 and F1 preferred. The Series G preferred provided for an immediate liquidation value of $7.05 per share, in excess of the purchase price. Accordingly, a charge of approximately $957,000 was recorded against retained earnings to accrete the value of the preferred stock to its liquidation value. In July 1999, the Company induced conversion of all preferred series by providing for conversion rates and terms that were more beneficial than the original terms. The conversion of all preferred series resulted in the issuance of 20,124,851 shares of the Company's common stock, 14,474,579 shares in excess of the number of shares that would have been issued under the original terms of the preferred series. Accordingly, a charge to retained earnings of approximately $7,000,000 has been recorded, based on a fair value of approximately $3.40 per common share, the fair value attributable to the Company's common stock in the Merger discussed in Note 3. 9. STOCK-BASED COMPENSATION PLANS The Company has two stock-based compensation plans, described below, which provide for the grant at fair market value. The Company applies APB Opinion No. 25 and related interpretations of accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net loss would have been the pro forma amounts indicated below: 1999 1998 --------------- --------------- Net loss as reported $ (15,800,000) $ (7,731,000) Net loss pro forma (16,656,000) (7,949,000) The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are not anticipated. Stock Option Plan As amended in the Certificate of Incorporation, the Company's Stock Plan (the "Plan") permits the granting of options to purchase an aggregate of 4,500,000 shares of the Company's Common Stock to employees and consultants of the Company. The Plan also permits the granting of stock purchase rights to employees and consultants of the Company. Under the Plan, the Company may grant either incentive or nonstatutory stock options; however, incentive options may only be granted to employees. The exercise price of an incentive stock option may not be less than the fair market value, as estimated by management, of the Company's common shares on the date such option is granted. The exercise price of 82 a nonstatutory stock option may be less than the fair market value on the date of grant. In accordance with SFAS No. 123, any grants to other than employees of the Company, and certain directors, will result in a charge on earnings based to the fair value of the instruments granted. Vesting terms of the options range from immediate vesting of all options to a ratable vesting period of 5-1/2 years. Option activity for the years ended December 31, 1999 and 1998 is summarized as follows (all amounts have been restated to reflect the Company's 1 for 7 reverse stock split (Note 8)):
1999 1998 -------------------------------- -------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ----------- ---------------- ------------ ---------------- Outstanding at beginning of year 288,875 $ 18.13 269,642 $ 16.73 Options granted 155,666 21.00 24,728 34.44 Options exercised - - (714) 17.50 Options forfeited (22,718) 22.43 (1,163) 18.48 Options canceled (46,521) 21.68 (3,618) 27.23 ----------- ------------ Outstanding at end of year 375,302 18.59 288,875 18.13 =========== ============ Exercisable at end of year 283,389 134,198 16.38 =========== ============ Weighted average fair value of options granted $ 14.84 $ 8.68
At December 31, 1999, there were 267,555 shares available for grant under the Plan. At December 31, 1999, there were 369,136 warrants issued and included in the Black-Scholes option pricing model for pro forma purposes. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999 and 1998, respectively: risk-free interest rate of 4.49% and 5.29%; no expected dividend yield, expected lives of 2.6 and 5.3 years; and .78 and 0 expected stock price volatility in 1999 and 1998, respectively. Exercise prices for outstanding options at December 31, 1999 and 1998 range from $5.20 - $38.00. The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------- --------------------------------------- Weighted Number Weighted Average Average Number Range of Exercise Outstanding at Remaining Exercise Exercisable at Weighted Average Prices December 31, 1999 Contractual Life Price December 31, 1999 Exercisable Price ----------------- ----------------- ---------------- ---------- ----------------- ----------------- $ 5.25 - $15.00 120,302 5 years $ 11.23 124,971 $ 11.23 15.01 - 20.00 76,014 5.9 years 17.99 52,379 18.22 20.01 - 25.00 156,334 4.9 years 21.80 106,382 21.67 25.01 - 40.00 22,652 8.2 years 37.53 5,143 37.28 ----------- ----------- 375,302 288,875 =========== ===========
83 Employee Stock Purchase Plan During 1994, the Company adopted a noncompensatory Employee Stock Purchase Plan (the "ESPP"), under which eligible employees may contribute up to 20% of their base earnings, through payroll deductions, toward the purchase of the Company's Common Stock. The employees' purchase price is derived from a formula based on the fair market value of the Common Stock. A total of 200,000 shares of Common Stock are reserved for issuance under the ESPP, of which 8,326 were purchased by employees during 1999. No compensation expense has been recorded in connection with these transactions to date as the aggregate differences between the purchase price and the fair value of the common stock purchased have been immaterial. Warrants In June 1999, the Company issued a warrant to purchase 600,000 shares of the Company's common stock to an entity for a commitment to participate in future financings. The warrant is exercisable for a three year period at an exercise price of $12 per share. The exercise price is subject to change for antidilution effects, as defined. The intrinsic value of this warrant of approximately $71,000 was charged to the statement of operations for the year ended December 31, 1999. 10. COMMITMENTS Royalty Payments In 1992, the Company entered into a license agreement with the Microelectronics Center of North Carolina ("MCNC"), granting the Company exclusive rights to all inventions and patents developed by MCNC involving field emission technology. The Company is obligated to pay a royalty in connection with the sale of products related to certain technologies of .1% to 2%, as defined, with minimum royalty payments of $50,000 per year through 1997 and $75,000 per year thereafter for as long as any one of the patents remains valid and outstanding. There were no sales of products in 1998 or 1997. In 1999, the Company terminated this license agreement. The Company has recorded $75,000 of royalty expense in research and development expenses for the year ended December 31, 1998. The Company, as a result of its acquisition of Virtual Vision (Note 4) was obligated to pay royalties to Insight Corporation ("Insight") on their license and sales revenues allocable to the patent application and patent acquired from Insight. If royalties payable in any year are less than $75,000, the Company may pay Insight the deficiency and receive a credit against royalties payable in future years. In 1999, the Company elected not to pay the deficiency and Insight exercised its right to repurchase the patent application and patent for $75,000. For the year ended December 31, 1998 the Company had recorded $56,250 of royalty expense in research and development expenses. There was no royalty expense incurred during 1999. License and Technology Agreement In March 1997, the Company entered into a technology agreement with a corporation to permit potential commercialization of small-format OLED displays. The Company is dependent upon its license agreement with the corporation for the development and commercialization of its currently planned OLED products. Payments are due under evaluation and license agreements based on the achievement of certain milestones in phases of the agreements. Payments totaling $650,000 and $250,000 for the years ended December 31, 1999 and 1998, respectively, were charged to research and development expense 84 under various phases of these agreements. Based on the remaining phases of the current agreements, the Company will be required to make additional payments of $250,000 in 2001, if the remaining phases of the agreements are achieved. Operating Leases The Company leases certain office facilities and office, lab and factory equipment under operating leases expiring through January 2004. Certain leases provide for payments of monthly operating expenses. The approximate future minimum lease payments are as follows: Year ending December 31: 2000 $ 2,879,000 2001 2,306,000 2002 1,046,000 2003 915,000 2004 383,000 ------------ $ 7,529,000 ============ For the year ended December 31, 1999, rent expense was approximately $2,813,000. 85 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained in the 2001 Proxy Statement under the heading "Information Regarding Directors and Executive Officers" is incorporated herein by reference in response to this item. ITEM 11: EXECUTIVE COMPENSATION. The information contained in the 2001 Proxy Statement under the heading "Compensation and Other Transactions with Directors and Executive Officers" is incorporated herein by reference in response to this item. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained in the 2001 Proxy Statement under the heading "Principal Stockholders" and "Stock Ownership of Directors and Management" is incorporated herein by reference in response to this item. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained in the 2001 Proxy Statement under the heading "Compensation and Other Transactions with Directors and Executive Officers" is incorporated herein by reference in response to this item. 86 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements Financial Statements are included in Item 8, "Financial Statements and Supplementary Data" as follows: - Report of Independent Public Accountants - Consolidated Balance Sheets as of December 31, 2000 and 1999 - Consolidated Statements of Operations for the Years ended December 31, 2000, 1999 and 1998 and for the period from inception (January 23, 1996) to December 31, 2000 - Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999, 1998 and 1997 and the period from inception (January 23, 1996) to December 31, 2000. - Consolidated Statements of Cash Flows--Years ended December 31, 2000, 1999 and 1998 and for the period from inception (January 23, 1996) to December 31, 2000 - Notes to Consolidated Financial Statements--December 31, 2000 (a) 2. Financial Statement Schedules None (a) 3. Exhibit List Exhibit Number Description 2.1 Agreement and Plan of Merger between Fashion Dynamics Corp., FED Capital Acquisition Corporation and FED Corporation dated March 13, 2000, as filed in the Registrant's Form 8-K/A Report (file no. 001-15751) incorporated herein by reference. 3.1 Articles of Incorporation filed January 23, 1996, as filed in the Registrant's Form 10-SB (file no. 000-24757) incorporated herein by reference. 87 3.2 Bylaws, as filed in the Registrant's Form 10-SB (file no. 000-24757) incorporated herein by reference. 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the Registrant defining rights of the holders of common stock of the Registrant. 10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8 (file no. 333-32474) incorporated herein by reference. 10.2 Consulting Agreement between eMagin Corporation and Verus International Ltd., dated March 16, 2000. 10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000. 10.4 Employment Agreement with Susan K. Jones, dated March 16, 2000. 10.5 Employment Agreement with Andrew Savadelis, dated September 11, 2000. 10.6 Nonexclusive Field of Use License Agreement relating to OLED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 29,1999. (Confidential treatment requested for portions of this agreement). 10.7 Amendment Number 1 to the Nonexclusive Field of Use License Agreement relating to OLED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 16, 2000. 10.8 Amendment Number 1 to the Lease between International Business Machines Corporation and FED Corporation dated July 9, 1999. 10.9 Lease between International Business Machines Corporation and FED Corporation dated May 28, 1999. 10.11 Amendment Number 2 to the Lease between International Business Machines Corporation and FED Corporation dated January 29, 2001. 10.12 Virtual Vision lease between Redson Building Partnership and Vision Newco dated December 15, 1995. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 88 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position Term Expiration - ---- --- -------- --------------- Gary W. Jones....... 46 President, Chief Executive Officer 2001 and Director Claude Charles...... 63 Director 2001 Ajmal Khan.......... 38 Director 2001 N. Damodar Reddy.... 60 Director 2001 Jack Rivkin......... 59 Director 2001 Martin L. Solomon... 64 Director 2001 Clive Barton........ 63 Chief Operating Officer George Cone......... 66 President, Virtual Vision Susan Jones......... 49 Executive Vice-President, Chief Strategy Officer and Secretary Andrew Savadelis.... 43 Executive Vice-President and Chief Financial Officer
89 Listed below is information concerning the Company's Directors and Executive Officers. Directors of the Company Gary W. Jones is a co-founder of FED Corporation/eMagin Corporation, and has served as Chairman, Chief Executive Officer, and President since 1992. Mr. Jones has over 20 years of experience in both public and private companies in the areas of business development, high volume manufacturing, product development, research, and marketing. Prior to founding FED Corporation/eMagin Corporation, Mr. Jones served as Director of the Device Development and Processing division at MCNC Center for Microelectronics from 1985 to 1992. From 1977 to 1985 Mr. Jones managed both semiconductor manufacturing and research and development programs at Texas Instruments. Mr. Jones has been a director, a member of the Executive Committee of the Board, and Chairman of the Technology Committee of the United States Display Consortium since 1995. Mr. Jones received a B.S. in electrical engineering and physics from Purdue University. 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 Peregrine Investment Holdings from 1990 to 1995, SG Warburg and Co. Ltd. from 1978 to 1982, Trident International Finance Ltd. from 1973 to 1978 and Dow Banking Corporation from 1965 to 1973. Mr. Charles received a B.S. in economics from the Wharton School at the University of Pennsylvania in 1957 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 has served on the boards of directors of Booktech.com Inc. and Wireless Internet Inc. since 2000. N. Damodar (Dan) Reddy has served as a director of eMagin since August of 1995. Mr. Reddy is also the co-founder of Alliance Semiconductor, where he has served as Chairman of the Board, CEO, and President since 1985. From 1983 to 1985 Mr. Reddy served as President and CEO of Modular Semiconductor, Inc., and from 1980 to 1983 he served as manager of Advanced 90 CMOS Technology Development at Synertek, Inc., a subsidiary of Honeywell, Inc. Mr. Reddy holds an M.S. in electrical engineering from North Dakota State University and an MBA from Santa Clara University. Jack Rivkin, has served as a director since June of 1996. Mr. Rivkin is an 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 Global Research at Smith Barney from March 1993 to October 1995. Mr. Rivkin has served on the board of directors of On2.com since 1997 and is a director of Celltech Group PLC and PRT Group. Mr. Rivkin holds an engineering degree in metallurgy from the Colorado School of Mines and an MBA from Harvard University. Martin L. Solomon, has served as a director since May of 2000. He served as Chairman and President of American Country Holdings Inc., an insurance holding company, from 1997 to August 2000, and as co-chairman from August 2000 to present. Since 1990, Mr. Solomon has been a private investor. Mr. Solomon was a Managing Director and general partner of Value Equity Associates, I. L.P., an investment partnership, from 1988 to 1990, and an investment analyst and portfolio manager with Steinhardt Partners from 1985 to 1987. Mr. Solomon has served on the board of directors of XTRA Corporation since 1990, Hexcel Corporation since 1996, Telephone and Data Systems, Inc. since 1997, and MFN Financial Corporation since 1999. Mr. Solomon holds a B.A. degree from Cornell University and attended New York University's Graduate School of Business Administration. General Information Concerning the Board of Directors The Board of Directors held 6 meetings during 2000. 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. During 2000, 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. Except for Mr. Gary Jones who is the spouse of Ms. Susan Jones, the Company's Executive Vice President and Secretary, neither the nominees for director nor any of the continuing directors of the Company has a family relationship with any of the other executive officers or other nominees for director. 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 91 independent public accountants. Messrs. Charles, Rivkin and Solomon were members of the Audit Committee during fiscal 2000. The Audit Committee met 3 times during fiscal 2000. 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. Reddy and Rivkin were members of the Compensation Committee during fiscal 2000 and met once during fiscal 2000. 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 2000. The Executive Committee met 2 times during the fiscal 2000. EXECUTIVE OFFICERS OF THE COMPANY Set forth below is certain information with respect to the Company's executive officers. Officers are appointed to serve at the discretion of the Board of Directors. Our Chief Executive Officer, President and Director, Gary W. Jones is the spouse of our Executive Vice President and Secretary, Susan K. Jones. Information about Mr. Jones is listed in the Director profile above. Clive E. Barton, has served as our Chief Operating Officer since 1995. Prior to joining us, Mr.Barton was President of Manufacturing Associates, a consulting firm, from 1991 to 1995. From 1986 to 1991 Mr. Barton served as President of Cypress Semiconductor (Texas), Inc. Mr. Barton's prior positions also include Plant Director for Advanced Micro Devices from 1980 to 1986, Operations Manager for Honeywell's Solid State Division from 1976 to 1980 and Manufacturing Manager for Fairchild Semiconductor from 1973 to 1976. Mr.Barton received his B.S. and M.S. in applied physics at the Institute of Physics in London, England. George W. Cone, has served as President of Virtual Vision Inc., since 1994. Prior to serving as President, Mr. Cone was a member of Virtual Vision Inc.'s Board of Directors from 1988 to 2001. From 1991 to 1994 Mr. Cone served as President of Innova Corporation. Mr. Cone was a founding member of America MicroCircuit Corporation, and served as its Executive Vice President from 1979 to 1982. Mr. Cone also served as Senior Vice President at Seattle Silicon from 1985 to 1990, President and CEO of Array Devices Inc., a leveraged buyout corporation, from 1982 to 1985 and President and CEO of OZ International. Mr. Cone attended West Contra Costa Junior College and San Jose State University. Susan K. Jones, is a co-founder of FED Corporation/eMagin Corporation, and has served as Executive Vice President, Chief Strategy Officer, and Secretary since 1992. Ms. Jones has 20 years of industrial experience, including senior research and management assignments at Texas Instruments and MCNC Center for Microelectronics Systems Technologies and sales and marketing experience with Merck, Sharp, & Dohme Pharmaceuticals. Ms. Jones serves on the boards or committees for several industry organizations including IEEE, SPIE, and Society Information Display since 1990. 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. 92 Andrew P. Savadelis, has served as our Chief Financial Officer, Executive Vice President, Finance since September of 2000. Mr. Savadelis previously served as Treasurer, Senior Director of Mergers and Acquisitions and Assistant Secretary for ANADIGICS, Inc., from 1993 to 2000. From 1986 to 1993, Mr. Savadelis held several different positions at Bristol-Myers Squibb Company. Mr. Savadelis received his B.S. in biology from Albright College and his M.B.A. from Cornell University. 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 2000. 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, 2000, 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 and/or cash for the year 2000 during 2001. 93 Summary Compensation Table
Long-Term Compensation Awards (Securities Other Annual Underlying Name and Principal Position Year Salary Bonus(1) Compensation Options) - --------------------------- ---- ------ ----- ------------ -------- Gary Jones...................... 2000 227,863 (1) (1) Chief Executive Officer 1999 188,377 1998 191,033 Clive Barton..................... 2000 222,740 Chief Operating Officer 1999 186,358 1998 187,998 George Cone...................... 2000 165,859 President, Virtual Vision 1999 156,418 1998 194,004 Susan K. Jones.................. 2000 183,837 (1) (1) Executive Vice President 1999 153,224 Chief Strategy Officer 1998 154,785 Andrew P. Savadelis............. 2000 91,667(2) 37,500(2) Executive Vice President 1999 Chief Financial Officer 1998
(1) The Compensation Committee plans to allocate a bonus in stock options and/or cash for the year 2000 during 2001. (2) Mr. Savadelis was employed for less than a full year in 2000. As such, his salary amount represents salary earned from his start date through the end of the fiscal year. Mr. Savadelis' compensation includes 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. In addition, the Company paid relocation assistance in the amount of $50,000 in October, 2000 and may pay an additional $75,000 upon the occurrence of certain relocation events. The Company also is committed to reimburse Mr. Savadelis up to $2,500 per month for twelve months from September 11, 2000 for temporary lodging expenses. 94 STOCK OPTIONS AND CERTAIN OTHER COMPENSATION The following table presents the stock options granted to the named executive officers in fiscal 2000 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% - ---- -------- ---- --------- ---- -- --- Clive Barton(1) (2) 234,906 8.4% $1.72 1/1/10 $254,098 $643,933 George Cone(1) (2) 14,500 .5% 1.72 1/1/10 15,685 39,748 Susan Jones(1) (2) 406,978 14.6% 1.72 1/1/10 440,228 1,115,623 Andrew P. 250,000 8.9% 8.90 9/25/10 1,399,290 3,546,077 Savadelis(4)
(1) Employees of the Company were awarded additional options prior to the acquisition of FED Corporation by eMagin Corporation) on a pro-rata basis of the employee's existing option allocations, due to the impact of the 7 to 1 reverse split that occurred in 1999. (2) One-fourth of the options become exercisable one year from the date of grant. The remaining options become exercisable ratably on a yearly basis over the following three years. The optionees have signed lock-up agreements to not sell the underlying shares of the options granted as follows; the first 20% cannot be sold before September 16, 2001, the remaining 80% cannot be sold until after June 16, 2002. (3) The exercise price of the stock options was based on the fair market value of the stock on the date of grant. (4) 50,000 shares vest six months from grant date; the remaining shares vest monthly over four years. 95 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, 2000:
# of Securities Value of Underlying Unexercised Unexercised In-the-money Shares Options at FY-End Options at FY-End Acquired Value ----------------- ----------------- on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ----------- -------- ----------- ------------- ----------- ------------- Gary Jones-------------- - - 78,572 - $31,428 $ - Clive Barton------------ - 99,189 205,147 39,675 82,058 George Cone------------- - - 4,432 14,354 1,773 5,741 Susan Jones------------- - - 196,598 330,670 78,639 132,268 Andrew P. Savadelis----- - - - 250,000 - -
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, each non-management Director is reimbursed for ordinary expenses incurred in connection with attendance at such meetings. EXECUTIVE EMPLOYMENT AGREEMENTS Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee during fiscal 2000 were Messrs. Reddy and Rivkin. Messrs. Reddy and Rivkin have never been an officer or employee of the Company. 96 None of the executive officers of the Company served as a member of the compensation committee of another entity during 2000. In connection with our merger with FED Corporation, effective March 16, 2000, we entered into employment agreements with Gary Jones and Susan Jones which provide for annual base salaries of $229,000 and $185,000 respectively and an annual discretionary bonus, as determined by our compensation committee, based on operating milestones and public market valuations. Effective September 25, 2000, we entered into an employment agreement with Andrew Savadelis with an annual base salary of $250,000. Gary Jones, Susan Jones and Andrew Savadelis are each entitled to severance in the amount of twelve months base salary in the event that they are terminated without cause. Additionally, the employment agreements of the above executive officers include 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. 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, Inc. Employee Savings and Protection Plan ("401(k) Plan"). 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 2000 was $225,000. The Compensation 97 Committee plans to allocate a bonus for 2000 during 2001, following the one-year anniversary of the employment agreement dated March 16, 2000. If the Company terminates Mr. Jones without cause, he shall be entitled to an amount equal to 100% of the sum of (A) his then annual base salary plus (B) his bonus, if any earned during the immediately preceding calendar year, health benefits for a maximum of twenty-four months, and immediate vesting of all stock options. 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: N. Dadomar Reddy 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, 2000 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 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.] 3/17/00 12/31/00 EMA $100 $9.24 Russell 2000 $100 $86.02 Peer $100 $32.52 98 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; (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, 2001. Unless otherwise indicated, the shareholders listed in the table have sole voting and investment power with respect to the shares indicated. PRINCIPAL STOCKHOLDERS
Shares Beneficially Owned --------------------------- Shares Percent ------ ------- Travelers Insurance Company (1)................................... 7,462,656 29.8% Jack Rivkin (2)............................... 7,462,656 29.8% Gary W. Jones (3)............................. 1,428,264 5.7% Susan K. Jones (3)............................ 1,428,264 5.7% Verus International Ltd. (4).................. 288,642 * Ajmal Khan (4)................................ 288,642 * N. Damodar Reddy (5).......................... 177,721 * Martin L. Solomon............................. 143,000 * Clive Barton (6).............................. 123,657 * Claude Charles................................ - 0 - * George Cone (7)............................... 6,800 * Andrew P. Savadelis (8)....................... - 58,333 - * All Directors and Executive Officers ......... as a Group (9) 9,689,073 38.6%
- --------------------- * Less than 1% of the outstanding common stock. 99 (1) Shares are owned by Travelers and its affiliates TRAL and Citicorp. This figure includes warrants held by Travelers and Citicorp to purchase 178,772 and 127,292 shares of common stock respectively. (2) Includes 7,462,656 shares owned by Travelers and its affiliates TRAL and Citicorp. This figure includes warrants held by Travelers and Citicorp to purchase 178,772 and 127,292 shares of common stock respectively. Jack Rivkin is an Executive Vice President of Citigroup/Travelers Insurance Company and shares voting power over the shares. (3) This figure represents shares owned by Gary Jones and Susan Jones who are married to each other, including 317,563 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, 2001. (4) Mr. Khan is the beneficial owner of the common stock held by Verus International Ltd. (5) Includes 88,691 shares of common stock issuable upon exercise of stock options that are exercisable within 60 days of April 1, 2001,. Also includes warrants to purchase 1,728 shares of common stock, which warrants are exercisable within 60 days of April 1, 2001. Mr. Reddy is also the beneficial owner of 53,778 shares of common stock and warrants to purchase 3,046 shares of common stock held through N.D.R. Investments Inc. (6) Includes 123,657 shares of common stock issuable upon exercise of stock options that are exercisable within 60 days of April 1, 2000. (7) Includes 6,800 shares of common stock issuable upon exercise of stock options that are exercisable within 60 days of April 1, 2001. (8) Includes 58,333 shares of common stock issuable upon exercise of stock options that are exercisable within 60 days of April 1,2001 (9) Includes 595,044 shares of common stock issuable upon exercise of stock options that are exercisable within 60 days of April 1, 2001. Also includes warrants to purchase 370,554 shares of common stock, which warrants are exercisable within 60 days of April 1, 2001. 100 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We entered into a consulting agreement dated January 15, 2000 with a member of our Board of Directors, Mr. Ajmal Khan. Terms of the agreement include monthly payments of $15,000 by us to Mr. Khan for consulting services rendered during 2000. 101 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 2001. 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, 2001 - --------------------------- (Principal Executive Officer) Gary Jones /s/ Andrew P. Savadelis Executive Vice President and Chief Financial April 30, 2001 - --------------------------- Officer (Principal Financial Accounting Officer) Andrew P. Savadelis /s/ Claude Charles Director April 30, 2001 - --------------------------- Claude Charles /s/ Ajmal Khan Director April 30, 2001 - --------------------------- Ajmal Khan /s/ N. Damodar Reddy Director April 30, 2001 - --------------------------- N. Damodar Reddy /s/ Jack Rivkin Director April 30, 2001 - -------------------------- Jack Rivkin /s/ Martin L. Solomon Director April 30, 2001 - --------------------------- Martin L. Solomon
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