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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-24757
eMagin Corporation
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(Exact name of registrant as specified in its charter)
Nevada 88-0378451
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
[LOGO]
2070 Route 52
Hopewell Junction, New York 12533
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(Address of principal executive offices) (Zip Code)
(845) 892-1900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 2001 was approximately $49.8 million, based upon the
closing sales price of the Registrant's common stock as quoted on the NASDAQ
National Market on such date. The number of shares outstanding of the
Registrant's common stock as of March 1, 2001 was 25,069,143
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement") (to be filed with the Securities and
Exchange Commission on or before May 30, 2001 is incorporated by reference in
Part III hereof).
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FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
INDEX
PART I
Item 1: Description of Business
Item 2: Description of Property
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Item 8: Financial Statements
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K
SIGNATURES
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FORWARD-LOOKING STATEMENTS
Some of the statements in this report contain forward-looking
information. These statements are found in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." They include statements concerning:
o our business strategy;
o expectations of market and customer response;
o liquidity and capital expenditures;
o future sources of revenues;
o expansion of our proposed product line; and
o trends in industry activity generally;
You can identify these statements by forward-looking words such as
"expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will" or
similar words. You should be aware that these statements are subject to known
and unknown risks, uncertainties and other factors, including those discussed in
the section entitled "Risk Factors," that could cause the actual results to
differ materially from those suggested by the forward-looking statements. For
example, assumptions that could cause actual results to vary materially from
future results include, but are not limited to:
o our ability to successfully develop and market our products to
customers;
o our ability to generate customer demand for our products in
our target markets;
o the development of our target markets and market
opportunities;
o our ability to manufacture suitable products at competitive
cost;
o market pricing for our products and for competing products;
o the extent of increasing competition;
o technological developments in our target markets and the
development of alternate, competing technologies in them; and
o sales of shares by existing shareholders
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PART I
ITEM 1: BUSINESS
Overview
We are a leading developer of microdisplays and related imaging
technology, which we believe will be a key enabling component for mobile
electronic products, including digital cameras, camcorders, entertainment and
gaming headsets, hand-held Internet and telecommunications appliances and
personal computers. Using our technology, a microdisplay smaller than one inch
diagonally can produce an image that appears comparable to that of a computer
monitor or a large-screen television.
Our microdisplays are based upon organic light emitting diode
(OLED)-on-silicon technology. OLED-on-silicon microdisplays offer a number of
advantages over current liquid crystal microdisplays, including increased
brightness, lower power requirements, less weight and wider viewing angles. We
license fundamental OLED technology from Eastman Kodak and have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We expect that the integration of our OLED-on-silicon
microdisplays into mobile electronic products will result in lower overall
system costs to our original equipment manufacturer (OEM) customers. Stanford
Resources, an industry market research organization, has recently identified the
emergence of OLED technology as a major advance, likely to become a major
industry driver. As the first to exploit OLED technology for microdisplays, we
believe that we will enjoy a significant advantage in commercializing this new
technology. We are the only company to announce and publicly show full-color
OLED-on-silicon microdisplays and this achievement has been recognized by the
Society for Information Display and Information Display Magazine who designated
us as winner of the prestigious Display of the Year Gold Award. We have
facilities suitable for producing commercial quantities of our initial
microdisplays, and we expect to begin commercial production during the
second half of 2001.
Our Market Opportunity
We expect the increasing demand for high resolution mobile electronic
products to drive the growth of the microdisplay industry. According to Display
Search, an industry market research organization, the microdisplay market is
currently projected to be a $700 million industry in the year 2000 and is
expected to grow to $2.3 billion over the next five years. Display Search also
projects the overall flat panel display industry will grow from $19.0 billion in
1999 to over $61 billion in 2005.
We believe our microdisplays, when combined with compact optic lenses,
will become a key component for a number of mobile electronic products. We are
targeting the following applications:
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Near-Eye Viewers for Digital Cameras, Camcorders and hand-held Internet
and telecommunications appliances
We believe that our microdisplays will enhance near-eye applications in
the following products:
o Digital cameras and camcorders, which typically use direct view
displays that are low resolution, offer a small visual image, and
are difficult to see on sunny days. According to Display Search,
41 million digital cameras and 13 million camcorders are expected
to be sold in 2005. Some of these products may incorporate
microdisplays as high resolution viewfinders which would permit
individuals to see enlarged, high resolution proofs immediately
upon taking the picture, giving them the opportunity to retake a
poor shot.
o Mobile phones and other hand-held Internet and telecommunications
appliances which will enable users to access full web and fax
pages, data lists, and maps in a pocket-sized device. According
to the Fuji Chimera Research Institute, an industry market
research organization, by 2005 the cellular phone and handheld
portable digital assistant markets will grow to 655 million units
and 20 million units, respectively. Some of these products may
eventually incorporate our microdisplays.
For each of these applications, we anticipate that our microdisplays,
combined with compact optic lenses, will offer higher resolution, lower power
and system cost and achieve larger images than are currently available in the
consumer market. As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.
Head-wearable displays
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, or simple head bands. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
o Entertainment and gaming video headset systems, which permit
individuals to view television (including HDTV), video CDs, DVDs
and video games on virtual large screens or stereovision in
private without disturbing others. According to DisplaySearch and
Fuji Chimera, gaming systems are expected to be a greater than 46
million unit business by 2005. Some of these products may
eventually incorporate our microdisplays. According to Display
Search, entertainment video system sales (TV and HDTV) are
expected to exceed 166 million units in 2003. Our microdisplays
have the potential to displace some of these units.
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o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase
privacy. Display Search, Fuji Chimera, and Frost and Sullivan
each estimate annual unit sales of notebook computers to exceed
47 million units by 2005. Current notebook computers do not use
microdisplays. Our market can apply not only to new notebook
computers, but also as aftermarket attachments to older notebooks
still in use. We expect to market our head-wearable displays to
be used as peripherals with most notebook computers.
o Handheld personal computers, whose small, direct view screens are
often a limitation, but which are now capable of running software
applications that could benefit from a larger display.
Microdisplays can be built into handheld computers to display
more information content on virtual screens. This market is still
in its infancy, but is expected to grow significantly.
o Super compact personal computers and personal digital assistants
(PDAs) using video headsets as screens can be made possible by
high resolution microdisplays. An under one pound pocket-size
computer could be created with a fold out keyboard and a headset
that provides a near desktop personal computer experience.
We believe that the combination of power efficiency, high resolution,
low systems cost, brightness and compact size offered by our OLED-on-silicon
microdisplays has not been made available to makers and integrators of existing
entertainment and gaming video headset systems, notebook computers and handheld
computers. In addition, we believe that our microdisplays will catalyze the
growth of new products and applications such as lightweight wearable computer
systems.
Military
Military demand for head-wearable displays is currently being met with
microdisplay technologies that we believe to be inferior to our OLED-on-silicon
head-wearable displays under development. According to Frost and Sullivan, an
industry market research organization, the total market for military flat panel
displays reached approximately $70 million in 1998 and is projected to grow
rapidly through 2005. Frost and Sullivan further projected that the current
military microdisplay market of less than $3 million should increase at an
overall growth rate in excess of 40 percent, and that microdisplays will
penetrate airborne, seaborne, and land applications, providing more mobile and
more rugged displays. New uses are being envisioned by the military for
individual soldiers, as well as in the areas of simulation, training,
operations, maintenance, and logistics in all branches of the military.
Commercial and Industrial
We believe that a wide variety of commercial and industrial markets
offer significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: 1) immediate access to inventory (parts, tools and equipment
availability), 2) instant accessibility to maintenance or construction manuals,
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3) routine quality assurance inspection, and 4) real-time viewing of images and
data during microsurgery or endoscopy.
Our Products
We believe that our OLED-on-silicon microdisplay and Microviewer(TM)
products which are currently under development will provide low-cost, high
resolution and full color video viewing, while maintaining miniature physical
size, light weight, and power efficiency.
Our initial products include OLED-on-silicon microdisplays,
Microviewers(TM) and head-wearable displays. We view our greatest initial
opportunities to include those markets where both performance and overall
display system cost requirements are not met by current commercially available
microdisplays.
We believe that our strategy of offering our products as both separate
components and integrated bundles that include microdisplays and lenses will
allow us to address the needs of the largest number of potential customers.
Our three major product groups are:
o eMagin OLED-on-silicon microdisplays for integration into
consumer and vertical market OEM products.
We plan to serve as a component manufacturer by supplying our
OLED-on-silicon microdisplays for those customers who have their own lenses or
integrated circuits.
o eMagin Microviewer(TM) modules that incorporate our
OLED-on-silicon microdisplay, compact lenses and electronic
interfaces for integration into consumer and vertical market OEM
products.
We plan to provide a cost-effective and rapid time to market
alternative for those customers who want a complete microdisplay and lens
assembly to integrate into their end product design. By providing an integrated
solution, we plan to allow OEM customers who require optical solutions to avoid
incurring expensive design and tooling costs.
o eMagin head-wearable display system designs for non-consumer
markets (commercial, industrial, medical, and military). Headsets
which incorporate Microviewers(TM) can be a part of larger
information systems for OEM customers, or attach directly to
existing systems platforms.
We intend to provide our design and manufacturing capabilities to those
customers who want a fully integrated, head-wearable solution.
We expect that our product offerings will significantly increase our
value-added for our potential customers and increase our revenue and margins. By
designing and tooling new microdisplay lenses and compatible solutions at each
level required by our various customers, we can reduce cost and time to market
for both eMagin and our OEM customers.
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OLED-on-Silicon Microdisplays
Our OLED-on-silicon microdisplays represent a new generation of
microdisplay technology. Because our microdisplays generate and emit light, they
have a wider viewing angle than the competing liquid crystal microdisplays, and
because they have the same high brightness at all forward viewing angles, our
microdisplays permit a large field-of-view and superior optical image. The wider
viewing angle of our display results in the following superior optical
characteristics: (1) the user does not need to as accurately position the
head-wearable display to the eye, (2) the image will change minimally with eye
movement and appear more natural, and (3) the Microviewer(TM) can be placed
further from the eye. In addition, our OLED-on-silicon microdisplays can offer
faster response times and use less power than liquid crystal microdisplays.
Since our displays are built on integrated circuit silicon chips, many computer
and video electronic system functions can be built directly into the display,
resulting in very compact, integrated systems. We expect this, coupled with our
lenses, to result in lower overall system costs.
We have recently completed the development of the first version of our
initial customer-oriented microdisplay, which has SVGA+ resolution. We are
currently developing a high luminance SXGA integrated circuit. These integrated
circuits become microdisplays when OLEDs and color filters are built on top of
the integrated circuit. We plan to sell our OLED-on-silicon microdisplays for
use as components by customers who prefer to design and build their own lenses.
We also plan to offer OLED processing on our customers' integrated circuits to
some OEMs who design their own integrated circuits.
o 0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52
added columns of data) for Consumer OEMs. This display has a
resolution of 852 x 3 x 600 pixels. The SVGA+ is planned as a
full-color or monochrome microdisplay primarily for high-end
consumer OEM products such as video/data head-wearable displays,
digital cameras, video cameras and game applications. Several
specialty medical, industrial, and military product manufacturers
have also expressed interest in this product. The initial stage
of technological development of this product is now complete and
the monochrome version was demonstrated at an industry convention
in Japan in October 2000. We are targeting initial sampling of
the color version in 2001. This product is designed to interface
with most portable personal computers and will be able to display
TV, DVD, and HDTV formats.
o 0.77-inch Diagonal SXGA (Super Extended Video Graphics Array) for
Industrial, Medical and Military Applications. We are developing
an introductory SXGA microdisplay product as a personal computer
compatible headset display for military, medical, high-end
commercial, and industrial applications. This product will have
1280 x 1024 pixels. This digital video and data interface product
is being designed to exhibit a wide dimming range and high
luminance for special military applications. We anticipate that
the performance features of the SXGA, such as high speed digital
video and 256 gray levels, have the potential to serve as a
catalyst for the development of new applications.
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o 0.24-inch Diagonal QVGA (Quarter Video Graphic Array with 320 x
240 pixels) for Consumer OEM Viewfinder and Game Applications.
The integrated circuits for these displays are in the early
stages of design and development. We plan to market these
microdisplays to lower price point camera and gaming
applications. We believe OEM customers could insert these
displays into existing products and optical systems with
relatively little system redesign effort. We expect these
microdisplays to be more cost effective for OEM customers than
the current liquid crystal microdisplays since our microdisplays
use less power, are simpler to assemble, require minimal added
circuitry, and require no separate light sources. We also believe
our microdisplays can be more compact and provide high quality
viewing to the end consumer without some of the problems
exhibited by other technologies, such as limited temperature
range, flicker, color sequential breakup, or angular light
dependence.
Microviewer(TM) Products
We are developing Microviewer(TM) modules which combine microdisplays
with compact optic lenses. Our combination of display and lenses provides large,
easy to view images that can be easily adapted to many end products. Our initial
display modules are designed to be compatible with a large number of electronics
interfaces.
We believe that a complete imaging solution may be a fundamental
requirement for many new product categories because of the complementary
requirements of illumination, lenses, and electronic interfaces. Once a complete
Microviewer(TM) module with an electronics interface is made, the creation of a
headset or personal viewer appliance primarily involves issues of styling
design, feature selection, and market channels.
We intend to sell our Microviewer(TM) modules to OEMs for integration
with their branded products or incorporated into our eGlass(TM) Personal
Viewer(TM) head-wearable displays. Many of our potential customers have stated a
preference for Microviewers(TM) over microdisplays since Microviewers(TM)
incorporate lenses which save OEMs a step in their manufacturing process. We
intend to sample our Microviewer(TM) products concurrently with, or as soon as
practicable after, the initial sampling of the base microdisplay.
eGlass(TM) Personal Viewer(TM) Head-Wearable Systems
Personal Viewer head-wearable systems, such as our eGlass(TM) Personal
Viewer(TM), give users the ability to work with their hands while simultaneously
viewing information or video on the display. Our head-wearable displays are a
versatile computer enabler, capable of delivering an image that appears
comparable to that of a 19-inch monitor at 22 inches from the eye using a 1.5
inch Microviewer(TM). We believe that Personal Viewer head-wearable displays
will fill the increasing demand for instant data accessibility in mobile
workplaces. We expect to sell the head-wearable displays primarily to OEM
systems and equipment customers. Our initial head-wearable products utilize
technologies other than OLED and we may continue to use such technologies in the
future.
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Our Strategy
Our strategy is to establish and maintain a leadership position in the
microdisplay industry by capitalizing on our leadership in both OLED-on-silicon
technology and microdisplay lenses technology. We intend to:
Leverage our superior technology to establish a leading market
position. As the first to exploit OLED-on-silicon microdisplays, we believe that
we enjoy a significant advantage in bringing this technology and its variants to
market. We believe that we have consolidated this advantage through our Eastman
Kodak license, other strategic relationships, and the development of our own
substantial intellectual property portfolio. We have an experienced management
team with substantial product development and manufacturing acumen. We plan to
maintain and further dedicate significant resources to expand our expertise and
to protect our intellectual property. We will also continue our technology
development collaborations with third parties. We believe that by leveraging our
intellectual property and our design capabilities, we can become a leader in the
emerging microdisplay industry.
Develop products for large consumer markets through key relationships
with OEMs. We expect our first target markets, entertainment and gaming systems
and personal computers, to create the first large-scale opportunities for our
OLED-on-silicon microdisplays. Our relationships with OEMs for these products,
have allowed us to identify initial microdisplay products to be produced for
headsets, followed by other applications such as digital cameras, camcorders and
hand-held Internet and telecommunications appliances. We expect digital cameras,
camcorders, and hand-held Internet and telecommunications appliances to emerge
as significant markets as production costs are reduced.
Increase revenues by completing our OEM qualification cycle. We have
been approached by a number of OEMs who are interested in incorporating our
SVGA+ microdisplay into their products. We intend to ship evaluation packages to
OEMs by mid-2001, which is the first step towards having the SVGA+ qualified for
use at the OEM level. The OEM qualification process typically takes 6 to 24
months. We then expect to receive our first volume orders for our microdisplays.
We have maintained detailed communications during the design phase of the SVGA+
with several prospective customers. As subsequent products are developed, they
will usually go through a similar evaluation cycle.
Optimize manufacturing efficiencies. We intend to outsource certain
capital-intensive portions of microdisplay production to minimize both our costs
and time to market. We intend to outsource integrated circuit fabrication while
retaining the OLED application and OLED sealing processes in-house. We believe
that these areas are where we have a core competency and manufacturing
expertise. We also believe that by keeping these processes in-house we can
protect our proprietary technology and process know-how. This strategy will also
enhance our ability to continue to optimize and customize processes and devices
to meet customer needs. In the area of lenses and head-wearable displays, we
intend to focus on design and development, while working with third parties for
the manufacturing and distribution of finished products. Similarly, we intend to
outsource volume manufacturing operations for optical systems while
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continuing to prototype and use low volume capability in-house. We will continue
to outsource part of our manufacturing when we deem it to be appropriate.
Build and maintain strong internal design capabilities. As more
circuitry is added to OLED-on-silicon devices, the cost of the end product using
the display can be decreased; therefore integrated circuit design capability
will become increasingly important to us. To meet these requirements, we intend
to continue to support building strong in-house design capabilities. Building
and maintaining this capacity will allow us to reduce engineering costs,
accelerate the design process and enhance design accuracy to respond to our
customers' needs as new markets develop. In addition, we intend to maintain a
product design staff capable of rapidly developing prototype products for our
customers and strategic partners. Contracting third party design support to meet
demand and for specialized design skills is expected to remain a part of our
overall long term strategy.
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
research and development activities to better meet our customer's requirements.
Moreover, we expect to provide microdisplays and Microviewers(TM) to some of
these partners, thereby solidifying and utilizing established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED
materials, and a potential future customer for both specialty market display
systems and consumer market microdisplays. Eastman Kodak owns equity in eMagin
and is an advisor to our Board of Directors. We license Eastman Kodak's OLED
technology portfolio.
We have a nonexclusive, worldwide license to use Eastman Kodak patented
OLED technology and associated intellectual property in the development, use,
manufacture, import and sale of microdisplays. The license covers emissive
active matrix microdisplays with a diagonal size of less than 2 inches. Our
license expires upon the expiration of the last-to-expire issued Eastman Kodak
OLED technology related patent covered under the license agreement. An annual
minimum royalty is paid upfront at the beginning of each calendar year and is
fully creditable against the royalties we are obligated to pay based on net
sales throughout the year. We have also granted to Eastman Kodak a nonexclusive
right to patents and associated intellectual property relating to OLED
technology developed by us, including the right to sublicense such technology to
third parties, in exchange for royalty payments in certain instances. Eastman
Kodak and eMagin have also engaged in numerous discussions regarding potential
product applications for eMagin's microdisplays by Eastman Kodak.
o We have entered into a joint research and development agreement with
IBM to accelerate the development of OLED-on-silicon technology. The
OLED-on-silicon microdisplays
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developed under the agreement have the potential to be incorporated in
future IBM products currently in exploratory or product development
stages. Nonexclusive, fully-paid-up license rights are available to us
or IBM for any intellectual property developed solely by the other
party under the agreement. This technology will be incorporated into
microdisplays for possible use in future microdisplay products,
including those manufactured by IBM, such as wearable computers and
handheld portable Internet appliances. The technology efforts resulted
in the development of a prototype watch computer utilizing the Linux
operating system, which features the world's first direct view OLED-on
silicon-display. The prototype was publicly demonstrated in January
2001 at the Consumer Electronics Show.
We also have a joint OLED materials development effort with Covion
Organic Semiconductors GmbH, a spin-off of Hoechst. We have worked with
Honeywell, Kaiser Electronics and Raytheon on a variety of U.S. government
research and development proposals and contracts toward the development of
displays for military and consumer applications. The US Air Force and US Army
are currently providing support under government research and development
contracts for microdisplay development with a goal of future procurement. We
currently also maintain industry relationships with LG Electronics, Harris,
Boeing, Department of Defense Advanced Research Projects Agency (DARPA), NASA,
Department of Commerce National Institute of Science and Technology (NIST),
Lawrence Livermore National Laboratories, Carnegie Mellon University, and the
United States Display Consortium, among others. We intend to establish
additional strategic relationships in the future.
Our Technology
We are in the later stages of development of advanced microdisplay
components and modules based on OLED-on-silicon technology. We have invested
over $34 million in developing OLED-on-silicon and related technologies during
the past four years which we believe will allow us to offer our potential
customers state-of the art microdisplay solutions. Additionally, approximately
$27 million in government funding has been applied toward further establishing
our overall technological capability in displays, most of which is directly
applicable to our microdisplay technology. We believe that our existing and
development-stage display technologies will position us to meet customer
requirements for performance and price for a variety of applications that
require high resolution, wide field of view, and low power consumption.
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s.
OLEDs are thin films of stable organic materials that emit light of various
colors when a voltage is impressed across them. OLEDs are emissive devices,
which means they create their own light, as opposed to liquid crystal displays,
which require a separate light source. As a result, OLED devices use less power
and can be capable of higher brightness and fuller color than liquid crystal
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microdisplays. Because the light they emit is Lambertian, which means that it
appears equally bright from most forward directions, a moderate movement in the
eye does not change the image brightness or color as it does in existing
technologies. OLED films may be coated on computer chips, permitting millions of
individual low-voltage light sources to be built on silicon integrated circuits
to produce single color, white, or full-color display arrays. Many computer and
video electronic system functions can be built directly into a silicon
integrated circuit upon which the OLED may be coated, resulting in an
ultra-compact system. We believe these features, together with the
well-established silicon integrated circuit fabrication technology of the
semiconductor industry, make our OLED-on-silicon microdisplays attractive for
numerous applications.
We believe our technology licensing agreement with Eastman Kodak,
coupled with our own intellectual property portfolio, gives us a leadership
position in OLED and OLED-on-silicon microdisplay technology. Eastman Kodak
provides many of the underlying OLED technologies and we provide additional
technology advancements that have enabled us to coat the silicon integrated
circuits with OLEDs. We expect OLED-on-silicon to bring features and benefits to
the microdisplay market including: high resolution, high luminance, flicker-free
imaging, high energy efficiency, thin, compact size, and low system cost. We
believe that the combined quality of these features surpasses any other
microdisplay technology currently available. OLED-on-silicon technology also
permits many additional functions to be integrated into the silicon integrated
circuit as part of the OLED microdisplay, making OLED-on-silicon a logical
choice for microdisplay system solutions.
We have developed numerous and significant enhancements to OLED
technology as well as key silicon circuit designs to effectively incorporate the
OLED film on a silicon integrated circuit. For example, we have developed a
unique, up-emitting structure for our OLED-on-silicon devices that enables OLED
displays to be built on opaque silicon integrated circuits rather than only on
glass. Our OLED devices can emit full visible spectrum light that can be
isolated with color filters to create full color images. Our microdisplay
prototypes have a brightness that can be greater than that of a typical notebook
computer and can have a potential lifetime of over 50,000 hours, in certain
applications. New materials and device improvements in development offer the
future potential for even better performance for brightness, efficiency, and
lifespan. Additionally, we have invested considerable work over several years to
develop unique electronics control and drive designs for OLED-on-silicon
microdisplays.
In addition to our OLED-on-silicon technology, we have developed
compact optic and lens enhancements which, when coupled with the microdisplay,
provide the high quality large screen appearance that we believe a large
proportion of the marketplace demands.
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Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant
advantages over existing solutions in our targeted microdisplay markets. We
believe these key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen
size;
o Low power consumption for improved battery life and longer system
life;
o Long operating life;
o High brightness for improved viewing; and
o High speed performance resulting in clear video images.
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built
on an 8-inch silicon wafer using existing automated OLED and color filter
processing tools. The level of automation used lowers labor costs. Only a small
amount of OLED material is used in OLED-on-silicon microdisplays so that
material costs, other than the integrated circuit itself, are small.
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits (ASICs), or
beam splitter lenses as is the case in liquid crystal microdisplays. Many
important display-related system functions can be incorporated into an
OLED-on-silicon microdisplay, reducing the size and cost of the system. Lenses
for many OLED-on-silicon applications can be made of a single piece of molded
plastic which reduces size, weight and assembly cost when compared to the
multipiece lens systems used for liquid crystal microdisplays. Because our
displays are power efficient, they typically require less power at the system
level than other display technologies at a given display size and brightness.
Wide angle light emission resulting in large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective liquid crystal on silicon microdisplays. This results in less eye
fatigue and makes it relatively easy to position the imaging systems.
Low power consumption for improved battery life and longer system life.
OLEDs can be energy efficient because of their high efficiency light generation.
Power efficiency can be high in OLED displays because they require only low
voltage switching (2-5 volts is typical, depending on the mode of operation) and
less display-external electronics. Furthermore, OLEDs conserve power by powering
only those pixels that are on while liquid crystal on silicon requires light at
15
all pixels all the time. The optical systems used for our OLEDs are highly
efficient, permitting over 80% of the light to reach the eye, versus reflective
technologies such as liquid crystal on silicon which require multiple beam
splitters to get light to the display, and then into the optical system. This
results in typically under 25% light throughput efficiency in reflective
microdisplay systems.
Long operating life. Most of our potential customers require 5,000 to
10,000 hours of half-life. Half-life references how long it takes the operating
display to reach half of its starting brightness. We believe our OLED display
technology already exceeds these numbers for most of our consumer product
applications.
High brightness for improved viewing. Because OLEDs have electrical
characteristics similar to those of semiconductor diodes, they can run at very
high brightness with only a moderate increase in voltage. This will enable us to
build extremely bright displays using drive voltages of 24 volts or less. This
feature can be of great value to military applications, where there is a need to
see the computer image overlayed onto brightly lighted real-life backgrounds
such as desert sand, water reflections or sunlit clouds. The OLED can be
operated over a large luminance range without loss of gray level control,
permitting the displays to be used in a range of dark environments to very
bright ambient applications. Since military simulation and situation awareness
applications, including night vision, typically require large fields of view,
the OLED's Lambertian optical characteristics make it an excellent choice.
High speed performance resulting in clear video images. The OLEDs
switch much more quickly than liquid crystals or cathode ray tubes (CRTs). This
characteristic, coupled with the storage of data at each pixel, results in a
stable image and produces no noticeable flicker, even at relatively slow refresh
rates. This eliminates visible image smear and makes practicable
three-dimensional stereo imaging using a split frame rate. This advantage of our
OLED-on-silicon is very important for 3-D stereovision gaming applications.
Because the OLED-on-silicon stores brightness and color information at
each pixel, the display can be run with no noticeable flicker and no color
sequential breakup. Color sequential breakup occurs in systems such as liquid
crystal on silicon and some liquid crystal display microdisplays when red, green
and blue frames are sequentially imaged in time for the eye to combine. Since
the different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a tough technological challenge as display
resolutions increase.
16
Our OLED-related Technological Milestones
We believe that we have made significant breakthroughs in
OLED-on-silicon microdisplay technology and that the following represent key
milestones:
Date Milestone
- ------------------------- ---------------------------------------------------------------------------------
May 1998 The first publicly displayed OLED-on-silicon integrated circuit video graphics
array video (monochrome VGA, 640x480 pixels). This showed that OLED
microdisplays could be built directly on silicon integrated circuits.
February 1999 The first publicly displayed up-emitting full color OLED-on-silicon video. (Low
resolution QVGA, 320x240 pixels using color filters). This showed that color
video capable OLEDs could be built on silicon integrated circuits using color
filters.
May 2000 The world's highest efficiency, bright white OLED-on-silicon publicly displayed
to date. We also demonstrated the world's highest resolution OLED display
publicly displayed to date (1280x1024 pixels) using a new white light emitter in
an OLED-on-silicon display. This showed that our OLEDs-on-silicon could provide
a good quality bright white image and could generate high resolution moving
images with quality gray scale control.
September 2000 The first publicly displayed full-color active matrix OLED-on-silicon
microdisplay (VGA resolution, 640x480 pixels). The display used color filters
built directly on top of the OLED display and incorporated our white light
organic light emitting diodes technology. This showed the first near
product-quality color moving images using OLED-on-silicon technology.
October 2000 We previewed the world's highest resolution super video graphics array (SVGA+,
852 x 3 x 600 pixels, over 1.5 million color elements) which was the first active
matrix OLED-on-silicon microdisplay designed for consumer applications ever
publicly displayed. The display was shown in white monochrome, but the
integrated circuit design is color compatible.
January 2001 We demonstrated, with IBM, the world's first direct view OLED-on-silicon
microdisplay, which was incorporated into a computer watch which used the Linux
operation system. The microdisplay has higher resolution and higher contrast than
other similarly sized wrist-worn multi-function displays.
These achievements were recognized by The Society for Information
Display (SID) and Information Display Magazine, which designated eMagin
Corporation the winner of the prestigious 2000 SID Information Display Magazine
Display of the Year Gold Award.
17
Lens System Technology
We have developed advanced lens technology for microdisplays and
head-wearable display systems and hold key patents in these areas. Our lens
technology permits our OLED-on-silicon microdisplays to provide large field of
view images that can be viewed for extended periods with reduced eye-fatigue. We
believe that the key advantages of our lens technology are that it:
o Can be very low cost, with minimal assembly. A one piece, molded
plastic optic attached to the microdisplay can serve many
consumer end-product markets. Since our process is plastic
molding, our per unit production costs are low;
o Allows a compact and lightweight lens system that can greatly
magnify a microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high
light throughput making the display image brighter or permitting
the use of less power for an acceptable brightness;
o Can be designed to provide focusing to enable users with various
eyesight qualities to view images clearly; and
o Can provide focal plane adjustment for simultaneous focusing of
computer images and real world objects. For example, this
characteristic is beneficial for word processing or spreadsheet
applications where a person is typing data in from reference
material. This feature can make it easier for older people with
moderately poor accommodation to use a head-wearable display as a
portable computer viewing accessory.
Complementary System Technology
We have developed a wide range of technologies which complement our
core OLED and lens technologies and which we believe will enhance our
competitive position in the microdisplay and head-wearable display markets.
These include:
o Head-wearable display technology. We have developed ergonomic
technologies that make head-wearable displays easier to use in a
wide variety of applications. For example, the use of our
patented rotatable eyeblocker provides a sharp image without
requiring most users to squint. The eyeblocker can also be moved
to create an effective see-through appearance. We believe that we
have made the lightest weight, high-resolution head-wearable
display ever publicly demonstrated.
o Wireless video technology. We have developed power efficient,
miniature, video and stereo sound, radio frequency
transmitter-receiver technology as part of a government program.
This can allow consumers to watch high quality video without
wires from
18
most locations in their home using existing entertainment (e.g.,
DVD or cable/satellite systems) or data systems. We expect this
capability to greatly increase the available market and demand
for video and data head-wearable displays and we are considering
this technology for use in low cost consumer applications.
Sales and Marketing
We identify companies with products that we believe would benefit from
our display components and contact the potential customers directly. OEMs and
their end customers then develop designs, technology, and manufacturing
processes to enable them to develop products for our target markets. We plan to
provide display components and Microviewer(TM) display-optic modules for OEMs to
incorporate in their branded products and sell through established distribution
channels. We believe successful marketing will require relationships with
recognized consumer brand companies. In addition, we market head-wearable
displays directly to various vertical market channels, such as medical,
industrial, and government customers.
All activities at eMagin evolve by determining and meeting our
customers' needs. We began our work on OLED technology over four years ago
because we recognized OLED's unique ability to provide a microdisplay solution
that would satisfy the market's requirements of low cost, high resolution and
complete portability which could not be fully met with alternative technologies.
Because our microdisplays are the main functional component that defines many of
our end products, we work closely with potential customers to define our
products to optimize the final design. In addition, we define and design our
products to address common OEM requirements in order to produce optimal designs
for multiple customers.
We are developing working relationships with several OEMs that sell or
plan to sell microdisplay systems. We design our products to meet individual
customer requirements, but look for ways to leverage our design and development
costs by incorporating multiple customers' requirements into each product.
We work closely with potential customers to maximize the probability
that our microdisplay and lenses products being designed will match the
anticipated future needs of the customers. An OEM design cycle is typically
between 6 and 24 months, depending on uniqueness of the market and the
complexity of the end product. To date, this process has been handled primarily
by senior management of the company. We plan to hire additional marketing and
customer service engineers to focus on the largest customers. The marketing
staff will identify new customer needs, and help insure that the integrated
circuit and electronics designers correctly understand the customers' product
specification and delivery needs.
Developing customers in the advanced flat-panel display industry
involves primarily technical marketing and customer service. We expect that as
the market for microdisplays matures and more universal embedded systems become
commonplace, the role of traditional OEM component sales will become more
important. Our management will continually reassess the success of our marketing
and sales methodology to best meet the needs of our customers.
19
Research and Development
We have strong internal research and development capabilities, with a
staff of more than 60 people, including over 15 Ph.D.s, directly engaged in
research and development or directly supporting research and development as a
majority of their efforts. OLED technology is a relatively new technology that
has considerable room for substantial improvements in luminance, life, power
efficiency, voltage swing, design compactness, and many other parameters. We
also expect that many manufacturing cost reduction opportunities still require
new technology developments. Improving the performance, capability and cost of
our products will provide an important competitive advantage in our fast moving,
high technology marketplace. The development of improved OLED and display device
structures, developing and/or evaluating new materials (including the synthesis
of new organic molecules), manufacturing equipment and process development,
electronics design methodologies and new circuits and the development of new
lenses and related systems are all current projects at this time. We determine
research and development projects primarily by near-term customer needs. In
order to improve customer satisfaction and simultaneously maximize our margins,
we must continue to engage in intensive research and development.
External relationships play an important role in our research and
development efforts. Suppliers, equipment vendors, government organizations,
contract research groups, external design companies, customer and corporate
partners, consortia, and university relationships all enhance the overall
research and development effort and bring us new ideas. Some of the
organizations we have research and development relationships with are:
o Eastman Kodak;
o IBM;
o Covion Organic Semiconductors GmBH, a developer of OLED
materials, and
o certain research institutes in the Ukraine, including the
National Academy of Science of Ukraine.
We received a Phase III Small Business Innovation Research grant from
the US Air Force, providing $19.6 million to fund research involving the
development of high-resolution active matrix organic light emitting diode
microdisplays for incorporation into military head-mounted displays. We also
work with Eastman Kodak and Honeywell in an Air Force-sponsored dual
applications research program to develop ultra-high luminance capable and high
temperature compatible OLEDs and with the US Army Night Vision Lab to develop
active matrix organic light emitting diode technology.
20
Manufacturing Facilities
We are co-located at IBM's Microelectronics Division facility located
about 70 miles north of New York City in Hopewell Junction, New York. We lease
approximately 25,000 square feet of space housing our own equipment for OLED
microdisplay fabrication, and for research and development plus additional space
for assembly and administrative offices. We believe that our lease agreement
with IBM for a 16,300 square foot class 10 clean room space, along with
additional, lower level clean room space, and the associated acquisition of
substantial amounts of advanced manufacturing equipment at a favorable cost,
represents a substantial asset and competitive advantage. Our lease runs until
2004 and we have the option to then renew it on the same terms for an additional
five, one-year terms. Facilities services provided by IBM include cleanroom,
pure gases, high purity de-ionized water, compressed air, chilled water systems,
and waste disposal support. This infrastructure provided by our lease with IBM
provides us with many of the resources of a larger corporation without the added
overhead costs. It further allows us to focus our resources more efficiently on
our product development and manufacturing goals. We expect our facility to be
capable of producing over 50,000 SVGA+ displays per month after equipment that
has been ordered becomes fully operational. We expect this capability to be on
line in the first half of 2001 and plan capacity expansions as production orders
materialize. Further capacity expansions are planned in 2002 as production
orders materialize.
Our manufacturing process for OLED-on-silicon microdisplays can be
separated into four major areas: silicon wafer design and integrated circuit
wafer fabrication, vacuum deposition for organic layers, sealing process, and
color application. After a device is designed by a combination of internal and
external designers with customer participation, we outsource wafer fabrication.
Upon receipt of completed wafers, OLED thin film processing takes place in our
cleanroom using automated vacuum deposition processes which are set up to
deposit OLED materials on single crystal silicon substrates. An automated
cluster tool provides all OLED fabrication steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. We are in the
process of automating our color filter processing capability with the majority
of this equipment already on our cleanroom floor. In addition to processing and
packaging equipment, we possess electrical and optical instrumentation required
to characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
We lease additional non-cleanroom facilities for chemical mixing,
cleaning, distributed chemical systems, glass polishing, and glass/silicon
cutting. We also occupy a research laboratory for organic chemical synthesis
where new OLED materials are developed. OLED chemicals are also purified in this
laboratory, permitting the company to evaluate new chemicals in pilot production
that are not yet available in suitable purity for OLED applications on the
market.
Our lenses and system development operation at Virtual Vision lease
approximately 11,000 square feet of space in Redmond, Washington. The facilities
include design stations, plastics milling and preparations, lenses fabrication,
product assembly, and office space. The facilities are well suited for designing
and building limited volume prototypes and industrial or
21
government products. We plan to outsource high volume head-wearable display
production to low cost plastics, lenses, and assembly manufacturers.
Intellectual Property
We have developed a significant intellectual property portfolio of
patents, trade secrets and know-how, supported by our license from Eastman Kodak
and our current patent portfolio.
Our license from Eastman Kodak gives us the right to use, in
microdisplays, a portfolio of more than 50 patents in light emitting diode
technology, some of which are fundamental. Our agreement with Eastman Kodak
provides for perpetual access to the OLED technology for our OLED-on-silicon
applications, provided we remain active in the field and meet our contractual
requirements to Eastman Kodak.
In our relationship with Eastman Kodak, we share information regarding
improvements in the OLED technology and materials generated internally, except
where restricted by agreements with other parties. This cooperation permits us
to move our research and development forward at a fast pace without needing to
dedicate our research and development resources to certain narrow fields.
Eastman Kodak and eMagin are also parties to a government research and
development program focused on developing ultra-high brightness capable and high
temperature compatible OLEDs. Each company is developing certain types of
molecules for potential use in different parts of the OLED device structure.
In addition to more than 50 patents licensed from Eastman Kodak, we
have a portfolio of our own 55 issued patents and 55 patent applications, which
are concentrated in the following areas:
o OLED Materials, Structures, and Processes
o Display Color Processing and Sealing
o Active Matrix Circuit Methodologies and Designs
o Field Emission and General Display Technologies
o Lenses and Tracking (Eye and Head)
o Ergonomics and Industrial Design
o Wearable Computer Interface Methodology
Our patents and patent applications cover a wide range of materials,
device structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe our patent applications relating to
up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important. Our intellectual property
also covers a wide range of materials, active matrix circuit techniques and
display system designs and lenses, device structures, processes and fabrication
methods. We believe that our intellectual property portfolio, coupled with our
strategic relationships and accumulated experience in the OLED field gives us an
advantage over potential competitors.
22
Competition
We believe that our key competition will come from liquid crystal on
silicon microdisplays (LCOS), also known as reflective liquid crystal displays.
While we believe that OLED-on-silicon provides comparatively lower lenses cost,
larger apparent image size, reduced electronics cost and complexity, enhanced
color, and improved power efficiency advantages over liquid crystal on silicon
microdisplays, there is no assurance that these benefits will be realized or
that liquid crystal on silicon manufacturers will not suitably improve these
parameters. Color liquid crystal on silicon displays are currently being
sampled, and may be in production a year or more earlier than color OLED
displays, which could have a significant detrimental effect on our market
opportunity. Companies pursuing liquid crystal on silicon technology include
Colorado Microdisplay, InViso, Microdisplay Corporation, Three-Five Systems,
Silicon Display, and Spatial Light among others.
We face competition in the OLED and microdisplay industry from a
variety of companies and technologies including Agilent (USA), SEL (Japan), and
MicroEmissive Displays (Britain, a start-up company). We may also compete with
potential licensees of Universal Display Corporation, Cambridge Display
Corporation, and Uniax Corporation. Even though we could potentially license
technology from these developers, potential competitors could also obtain
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face
competition on a price and performance basis from major manufacturers such as
Sony and Seiko Epson. However, these companies use first generation liquid
crystal on polysilicon technology which we believe is not as advanced as ours,
and therefore, we believe that they may incorporate our technology into their
products when it becomes available. Laser scanning systems, including systems
being developed by Microvision Corporation, offer high brightness imaging, could
eventually be low power, and could potentially compete in high ambient light
conditions (sunlight) when a large field of view is not required. We may also
face competition from electroluminescent image system companies such as Planar.
We believe these technologies face many hurdles to becoming a high image
quality, low cost, large area full color, near-eye display.
Employees
As of December 31, 2000, we had a total of 85 employees of which 19
employees were located at Virtual Vision. Of these, 64 employees were engaged in
research and development and manufacturing operations, 6 in communications and
marketing and 15 in general administration. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
23
CERTAIN TRANSACTIONS
We were originally incorporated as Fashion Dynamics Corporation on
January 23, 1996 under the laws of the State of Nevada. For the three years
prior to March 2000, Fashion Dynamics Corporation had no active business
operations, and sought to acquire an interest in a business with long-term
growth potential. On March 16, 2000, Fashion Dynamics Corporation acquired FED
Corporation, a Delaware corporation, through the merger of its wholly-owned
subsidiary, FED Capital Acquisition Corporation, with and into FED Corporation.
In connection with the merger, Fashion Dynamics Corporation changed its name to
eMagin Corporation, which was derived from "electronic imaging," and we listed
our securities on the American Stock Exchange. FED Corporation, the operating
subsidiary of eMagin Corporation (formerly known as Fashion Dynamics
Corporation) also changed its name to eMagin Corporation.
Prior to the Merger:
o Fashion Dynamics Corporation had 20,156,400 shares of common
stock issued and outstanding.
o FED Corporation had 5,243,192 shares of common stock issued and
outstanding.
o FED Corporation had issued warrants to purchase 400,130 shares of
its common stock.
o FED Corporation had issued options to purchase 1,671,416 shares
of its common stock.
At the effective time of the Merger:
o All outstanding common shares of FED Corporation were converted
into common shares of Fashion Dynamics Corporation on a 2:1
basis.
o All outstanding warrants to acquire shares of FED Corporation
were converted into warrants to acquire shares of Fashion
Dynamics Corporation on a 2:1 basis.
o All outstanding options to acquire shares of FED Corporation were
converted into options to acquire shares of Fashion Dynamics
Corporation on a 2:1 basis.
Pursuant to rights under the terms of the merger agreement dated March
13, 2000 between the Company, FED Capital Acquisition Corporation and FED
Corporation, Citigroup/Travelers Insurance Company designated one board member,
Jack Rivkin, Verus International Ltd. designated three board members, Ajmal
Khan, Claude Charles and Martin L. Solomon and FED Corporation designated two
board members, Gary W. Jones and N. Damodar Reddy.
FED Corporation was originally incorporated in 1992 in Raleigh, North
Carolina. Its original purpose was the development and commercialization of flat
panel display technology for displaying data, information, and video. As a
result of its successful research in the area of field
24
emission displays, it was awarded approximately $13 million in government
contracts to support field emission display technology development.
In 1994, FED Corporation relocated its operations to IBM's East
Fishkill, New York campus, and purchased equipment for manufacturing and
research and development. In connection with this move, FED Corporation, a
Delaware corporation, was incorporated, and FED Corporation, a North Carolina
corporation, was merged into the Delaware corporation with the latter being the
survivor. In 1996, FED Corporation began work related to the manufacturing and
design of microdisplays based upon Eastman Kodak's small molecule, OLED
technology in combination with its own intellectual property. In 1997, FED
Corporation acquired a license from Eastman Kodak to commercialize this
technology. Since 1997, FED Corporation has applied this OLED technology to
produce high resolution microdisplay applications in which a small display is
magnified via lenses to produce a larger virtual image.
In April 1998, FED Corporation acquired Virtual Vision for the purpose
of accelerating the emergence of a commercial market for video headsets. This
acquisition provided FED Corporation with a second core competency in advanced
lenses that complements its expertise in semiconductor and display technology.
In 1998 FED Corporation established a sales and marketing office in Santa Clara,
California.
On March 16, 2000, we entered into a two-year consulting agreement with
Verus International Ltd. Verus International Ltd. is a shareholder of eMagin.
Additionally, Ajmal Khan, a director of eMagin, also serves as president of
Verus International Ltd. Pursuant to the terms of the consulting agreement, we
are obligated to pay Verus International Ltd. a fee of $15,000 per month for 24
months from March 16, 2000 in consideration for Verus International Ltd.'s
advisory and consulting services offered to us.
25
RISK FACTORS
Set forth below and elsewhere in this Report and in other documents we
file with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report.
Risks Related To Our Financial Results
We have a history of losses since our inception and expect to incur losses for
the foreseeable future.
Since our inception, we have incurred significant losses and had an
accumulated loss of approximately $100.7 million as of December 31, 2000. We
have not achieved profitability and we expect to continue to incur operating
losses for the foreseeable future as we fund operating and capital expenditures
in areas such as establishment and expansion of markets, sales and marketing,
operating equipment and research and development. We cannot assure investors
that we will ever achieve or sustain profitability or that our operating losses
will not increase in the future.
We are presently dependent on U.S. government contracts.
The majority of our revenues to date have been derived from research
and development contracts with the U.S. federal government. We may continue to
rely on such contracts for revenue until volume commercial sales commence. Our
government contracts may be terminated by the government at its discretion. We
plan to submit proposals for additional development contract funding; however,
funding is subject to legislative authorization and even if funds are
appropriated such funds may be withdrawn based on changes in government
priorities. No assurances can be given that our existing contracts will
continue, that we will be successful in obtaining new government contracts, or
that programs through which our contracts are funded will continue to be funded
beyond the current fiscal year. Our inability to obtain revenues from government
contracts could have a material adverse effect on our results of operations.
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of our
products, and the termination of this license, Eastman Kodak's licensing of its
OLED technology to others for microdisplay applications, could have a material
adverse impact on our business.
Our principal products under development utilize OLED technology that
we license from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce
key patents held by Eastman Kodak, relating to OLED display technology. Eastman
Kodak's patents expire over a range of years from 2002 to 2020. Our license with
Eastman Kodak could terminate if we fail to perform any material term or
covenant under the license agreement. Since our license from Eastman Kodak is
non-exclusive, Eastman Kodak could also elect to become a competitor itself or
to license its OLED technology for microdisplay applications to others who have
the potential
26
to compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
We may not be successful in protecting our intellectual property and proprietary
rights.
We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, and protection of our intellectual property rights may be limited in
certain foreign countries. We may be required to expend significant resources to
monitor and police our intellectual property rights.
Any future infringement or other claims or prosecutions related to our
intellectual property could have a material adverse effect on our business. Any
such claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, or require us to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all.
Risks Related To The Microdisplay Industry
The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products.
The market for microdisplays is emerging. Our success will depend on
consumer acceptance of microdisplays as well as the success of the
commercialization of the microdisplay market. At present, it is difficult to
assess or predict with any assurance the potential size, timing and viability of
market opportunities for our technology in this market. The viewfinder
microdisplay market sector is well established with entrenched competitors who
we must displace.
The microdisplay systems business is intensely competitive.
We do business in intensely competitive markets that are characterized
by rapid technological change, changes in market requirements and competition
from both other suppliers and our potential OEM customers. Such markets are
typically characterized by price erosion. This intense competition could result
in pricing pressures, lower sales, reduced margins, and lower market share. Our
ability to compete successfully will depend on a number of factors, both within
and outside our control. We expect these factors to include the following:
o our success in designing, manufacturing and delivering expected
new products, including those implementing new technologies on a
timely basis;
27
o our ability to address the needs of our customers and the quality
of our customer services;
o the quality, performance, reliability, features, ease of use and
pricing of our products;
o successful expansion of our manufacturing capabilities;
o our efficiency of production, and ability to manufacture and ship
products on time;
o the rate at which original equipment manufacturing customers
incorporate our product solutions into their own products;
o the market acceptance of our customers' products; and
o product or technology introductions by our competitors.
Our competitive position could be damaged if one or more potential OEM
customers decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
Competing products may get to market sooner than ours.
Our competitors are investing substantial resources in the development
and manufacture of microdisplay systems using alternative technologies such as
reflective LCDs, LCD-on-Silicon ("LCOS") microdisplays (Colorado Microdisplay,
Inc., InViso Inc., The Microdisplay Corporation, Three-Five Systems, Inc.,
Silicon Display and SpatiaLight, Inc. among others), active matrix
electroluminescence and scanning image systems (Planar Systems, Inc. and
Microvision Inc.) and transmissive AMLCD (Sony Corporation, Seiko Epson
Corporation, and Kopin Corporation). Color LCOS displays are currently in
initial production, and may be in volume production a year or more earlier than
our microdisplays, which could have a significant detrimental effect on our
market opportunity.
Our competitors have many advantages over us.
We expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical and marketing resources
than us, as well as emerging companies attempting to obtain a share of the
various markets for which our microdisplay products have the potential to
compete.
Our products are subject to lengthy OEM development periods.
We plan to sell most of our microdisplays to OEMs who will incorporate
them into products they sell. OEMs determine during their product development
phase whether they will incorporate our products. The time elapsed between
initial sampling of our products by OEMs, the custom design of our products to
meet specific OEM product requirements, and the ultimate
28
incorporation of our products into OEM consumer products could be significant.
If our products fail to meet our OEM customers' cost, performance or technical
requirements or if unexpected technical challenges arise in the integration of
our products into OEM consumer products, our operating results could be
significantly and adversely affected. Long delays in achieving customer
qualification and incorporation of our products could adversely effect our
business.
Our products will likely experience rapidly declining unit prices.
In the markets in which we expect to compete, prices of established
products tend to decline significantly over time. In order to maintain our
profit margins over the long term, we believe that we will need to continuously
develop product enhancements and new technologies that will either slow price
declines of our products or reduce the cost of producing and delivering our
products. While we anticipate many opportunities to reduce production costs over
time, there can be no assurance that these cost reduction plans will be
successful. We may also attempt to offset the anticipated decrease in our
average selling price by introducing new products, increasing our sales volumes
or adjusting our product mix. If we fail to do so, our results of operations
would be materially and adversely affected.
Risks Related To Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services.
We do not manufacture our silicon integrated circuits on which we
incorporate the OLED. Instead, we expect to provide the design layouts to
semiconductor contract manufacturers who will manufacture the integrated
circuits on silicon wafers. We also expect to depend on suppliers of a variety
of other components and services, including circuit boards, graphic integrated
circuits, passive components, materials and chemicals, and equipment support.
Our inability to obtain sufficient quantities of high quality silicon integrated
circuits or other necessary components, materials or services on a timely basis
could result in manufacturing delays, increased costs and ultimately in reduced
or delayed sales or lost orders which could materially and adversely affect our
operating results.
We have not manufactured OLED-on-silicon products in commercial quantities and
we do not know if our manufacturing yields will be commercially viable.
In order for us to be successful as a product or component
manufacturer, our products must be manufactured to meet high quality standards
in commercial quantities at competitive prices. We have not begun commercial
production on any of our OLED-based products and we do not currently have the
capability to manufacture products in commercial quantities. The manufacture of
OLED-on-silicon is new and OLED microdisplays have not been produced in
significant volumes. We expect to begin commercial production during 2001 to
meet anticipated demand for our products. If we are unable to produce our
products in sufficient quantity, we will be unable to attract customers. In
addition, we cannot assure you that once we commence volume production we will
attain yields that will result in profitable gross margins or that we will
29
not experience manufacturing problems which could result in delays in delivery
of orders or product introductions.
We are dependent on a single manufacturing line.
We initially expect to manufacture our products on a single
manufacturing line. If we experience any significant disruption in the operation
of our manufacturing facility we may be unable to supply microdisplays to our
customers. For this reason, some OEMs may also be reluctant to commit a broad
line of products to our microdisplays without a second production facility in
place. Interruptions in our manufacturing could be caused by manufacturing
equipment problems, the introduction of new equipment into the manufacturing
process or delays in the delivery of new manufacturing equipment. Lead time for
delivery of manufacturing equipment can be extensive. No assurance can be given
that we will not lose potential sales or be unable to meet production orders due
to production interruptions in our manufacturing line.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business.
We are dependent upon the active participation of several key
management personnel including Gary W. Jones, our Chief Executive Officer and
Susan K. Jones, our Executive Vice President who are married to each other.
While we currently maintain a key employee insurance policy on our CEO, we may
elect to discontinue this insurance at any time. We also need to recruit
additional management personnel in order to expand according to our business
plan. The failure to attract and retain additional management personnel could
have a material adverse effect on our operating results and financial
performance.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel.
We must hire highly skilled technical personnel as employees and as
independent contractors in order to develop our products. The competition for
skilled technical employees is intense and we may not be able to retain or
recruit such personnel. We must compete with companies that possess greater
financial and other resources than we do, and that may be more attractive to
potential employees and contractors. To be competitive, we may have to increase
the compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a materially adverse affect on our business
and our operating results. In addition, difficulties in hiring and retaining
technical personnel could delay the implementation of our business plan.
Our business depends on new products and technologies.
The market for our products is characterized by rapid changes in
product, design and manufacturing process technologies. Our success depends to a
large extent on our ability to develop and manufacture new products and
technologies in order to establish a competitive position and become profitable.
Furthermore, we must adopt our products and processes to
30
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology.
Our prospects will be significantly affected by our ability to develop
strategic alliances with OEMs for incorporation of our OLED-on-silicon
technology into their products. While we intend to continue to establish
strategic relationships with manufacturers of electronic consumer products,
personal computers, chipmakers, lens makers, equipment makers, material
suppliers and/or systems assemblers, there is no assurance that we will be able
to continue to establish and maintain strategic relationships on commercially
acceptable terms, or at all. Failure to do so would have a material adverse
effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow may be limited.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including our success in completing the
development of our products, manufacturing and marketing our products and
competing technological and market developments. We may not be able to generate
sufficient cash from our operations to meet additional working capital
requirements, support additional capital expenditures or take advantage of
acquisition opportunities. In addition, substantial additional capital may be
required in the future to fund product development and product launches. No
assurance can be given that additional financing will be available or that, if
available, such financing will be obtainable on terms favorable to us or our
shareholders. To the extent we raise additional capital by issuing equity or
securities convertible into equity, our current shareholders will suffer
dilution in ownership. If needed capital is unavailable, our ability to continue
to operate and grow our business could be adversely affected.
Our business exposes us to product liability claims.
Our business exposes us to potential product liability claims. Although
no such claim has been brought against us to date, and to our knowledge no such
claim is threatened or likely, we may face liability to product users for
damages resulting from the faulty design or manufacture of our products. While
we maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
31
Our business is subject to environmental regulations and possible liability
arising from potential employee claims of exposure to harmful substances used in
the development and manufacture of our products.
We are subject to various governmental regulations related to toxic,
volatile, experimental and other hazardous chemicals used in our design and
manufacturing process. Our failure to comply with these regulations could result
in the imposition of fines or in the suspension or cessation of our operations.
Compliance with these regulations could require us to acquire costly equipment
or to incur other significant expenses.
We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials we can not assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock.
A large percentage of our outstanding common stock (approximately 35%)
is owned by current and former directors and officers of eMagin Corporation or
their affiliates. If these shareholders were to vote together, they could
significantly influence the outcome of items that are submitted to a vote of the
shareholders including the election of our directors.
We cannot forecast our future performance.
We cannot accurately forecast our revenues because of our limited
commercial operating history and because the OLED microdisplay market is only
beginning to emerge. We may experience significant fluctuations in our quarterly
operating results due to many factors which are outside our control. These
factors include:
o fluctuation in demand and orders for our products;
o timing or cost of future supply or equipment deliveries;
o manufacturing capacity and yields;
o variations in product and process development costs;
o expenses or operational disruptions resulting from acquisitions;
o activities of our competitors; and
o general economic conditions.
Due to these factors, we cannot anticipate with any degree of certainty what our
revenues, if any, will be in future periods. You have limited historical
financial data and operating results with which to evaluate our business and our
prospects. As a result, you should consider our prospects in light of the
expense, difficulties and delays frequently encountered by early stage companies
formed to pursue development of new technologies.
32
Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation.
Our common stock has experienced substantial price volatility. In
addition, the stock market has experienced extreme price and volume fluctuations
that have affected the market price of many technology companies, in particular,
and that have often been unrelated to the operating performance of these
companies. These factors, as well as general economic and political conditions,
may materially adversely affect the market price of our common stock in the
future. Accordingly, investors in our common stock may experience a decrease in
the value of their common stock regardless of our operating performance or
prospects.
In addition, the trading price of our common stock could be subject to
wide fluctuations in response to:
o our perceived prospects;
o quarter to quarter variations in our operating results;
o changes in earnings estimates or recommendations by securities
analysts and market perceptions of our operating results in
relation to those estimates or recommendations;
o changes in market valuation of companies in the microdisplay
systems industry;
o announcements of technological innovations or new products by us
or our competitors;
o sales of shares by existing shareholders; and
o general conditions in the personal products industries or stock
market conditions.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in their share price. Those
companies, like us, that are involved in rapidly changing technology markets are
particularly subject to this risk. This type of litigation, if instituted
against us, could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business.
ITEM 2: PROPERTIES
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 45,000 square feet of space,
all of which is located in the same industrial park. Approximately 25,000 square
feet of space houses our own equipment for OLED microdisplay fabrication, and
for research and development plus additional space for assembly operations.
Approximately 20,000 square feet of space is used for administrative offices.
Our lease runs until 2004 and we have the option to then renew it on the same
terms for an additional five, one-year terms.
33
We occupy 2,200 square feet of office space located in Santa Clara,
California under a lease agreement, which expires in January 2002.
Our lenses and system development operation at Virtual Vision lease
approximately 11,000 square feet of space in Redmond, Washington. The lease for
this facility runs until June 2002.
eMagin Corporation's telephone number is (845) 892-1900. Our website
address is www.eMagin.com.
ITEM 3: Legal Proceedings
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the Fiscal Year covered by this Report.
34
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the American Stock Exchange under
the symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000
our common stock had been quoted on the OTC Bulletin Board under our prior name
"Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there
had been no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchange and the OTC Bulletin Board. With respect
to OTC Bulletin Board quotes, these prices reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
High Low
---- ---
2000
First Quarter (through March 16, 2000)..................20.625 5.938
First Quarter (since March 17, 2000)....................22.938 19.500
Second Quarter..........................................20.250 8.500
Third Quarter...........................................13.000 7.875
Fourth Quarter.......................................... 9.750 2.040
As of March 1, 2001, there were 25,069,143 shares of common stock outstanding
and 515 holders of record.
We have never declared nor paid cash dividends on our capital stock. We
intend to retain future earnings, if any, for the development and operation of
our business, and do not anticipate paying any cash dividends in the foreseeable
future. Any determination whether to pay dividends will depend on a number of
factors, including our results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal and regulatory restrictions on the payment of
dividends and other factors that our Board of Directors deems relevant. There
are no restrictions that currently limit our ability to pay dividends on our
common stock.
35
ITEM 6: SELECTED FINANCIAL DATA
You should read the following selected financial data together with
Item 7 entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements including accompanying
notes, and other financial information, all of which are included elsewhere in
this report. The selected financial data for the fiscal years ended December 31,
1996, 1997, 1998, 1999, and 2000 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent
auditors. The historical results are not necessarily indicative of results to be
expected for any future period.
Prior to the acquisition of FED Corporation, Fashion Dynamics
Corporation had no active business operations. Management believes that the
comparison of eMagin's financial results to that of the operating entity (FED
Corporation) provides the most meaningful comparative information to the reader.
Accordingly, the comparative information that follows, reflects the operating
results of FED Corporation for all periods prior to the merger and it should be
read in conjunction with the consolidated financial statements and notes thereto
of this Form 10-K.
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1996 1997 1998 1999 2000 (1)
------ -------- --------- ---------- -----------
(unaudited)
Statement of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Net Contract Revenues............... $224 $3,626 $6,154 $1,895 $3,126
------ -------- --------- ---------- -----------
Total revenue................ 224 3,626 6,154 1,895 3,126
Costs and Expenses:
Research and Development
(net of funding under cost
sharing arrangements) .............. 4,323 5,234 10,250 10,171 11,815
Non-cash expense for
conversion of debt to
common stock ....................... -- -- -- 1,917 --
Non-cash stock-based
compensation........................ -- -- -- -- 10,319
Amortization of purchase
intangibles......................... -- -- -- -- 20,932
Acquired in-process
research and development ........... -- -- -- -- 12,820
General and Administrative.......... 2,038 2,015 3,514 5,203 6,145
------ -------- --------- ---------- -----------
Loss from operations.................. (6,137) (3,623) (7,610) (15,396) (58,905)
------ -------- --------- ---------- -----------
36
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1996 1997 1998 1999 2000 (1)
------ -------- --------- ---------- -----------
(unaudited)
Other income (expense)................ 115 (107) (122) (404) (2,616)
------ -------- --------- ---------- -----------
Net loss.............................. (6,022) (3,730) (7,732) (15,800) (61,521)
------ -------- --------- ---------- -----------
Basic and diluted net $ (1.12) $(.69) $(1.42) $(6.04) $(2.95)
loss per share........................
Weighted average shares
outstanding used in basic
and diluted per-share
calculation......................... 5,396,729 5,437,537 5,450,293 2,614,743 22,144,904
(1) The summary financial data for the year ended December 31, 2000
represent a pro forma presentation of the results for this period, containing
the operating results of eMagin Corporation for the year ended December 31,
2000, with the operating results of FED Corporation for the period from January
1, 2000 through March 15, 2000, in order to present operating results for the
year period for comparative purposes.
As of December 31
---------------------------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
Balance Sheet Data: (IN THOUSANDS)
Working capital (deficit)................ $7,810 $ 2,888 $ 3,371 $(3,295) $ 6,243
Total assets............................. 10,334 6,906 11,163 5,038 62,549
Current maturities of long-term debt..... -- -- 62 269 313
Short-term debt.......................... -- -- -- 2,127 --
Total shareholders' equity .............. $ 4,718 $ 1,016 $ 4,693 $60 $ 59,184
37
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and the notes to those statements and other financial information
appearing elsewhere in this report. Our fiscal year ends December 31.
Overview
We are a leading developer of OLED-on-silicon microdisplays and optics
systems. Our fundamental expertise is in combining low cost integrated circuits
with flat, emissive display technologies to provide high quality imaging systems
in a thin, lightweight format with features we believe to be superior to
existing microdisplay technologies. We are planning to begin commercial
manufacturing and distribution of our products and technology as components to
OEM system manufacturers for near-eye and headset applications in products such
as entertainment and gaming headsets, handheld Internet and telecommunication
appliances, and wearable computers.
eMagin Corporation was originally incorporated as Fashion Dynamics
Corporation on January 23, 1996 under the laws of the State of Nevada. For the
three years prior to the merger, Fashion Dynamics Corporation had no active
business operations, and sought to acquire an interest in a business with
long-term growth potential. On March 16, 2000, Fashion Dynamics Corporation
acquired FED Corporation (derived from field emissive device), subsequently
changed its name to eMagin Corporation (derived from "electronic imaging") and
listed its common stock on the American Stock Exchange under the "EMA" trading
symbol.
Under the terms of the merger, Fashion Dynamics Corporation issued
approximately 10.5 million shares of its common stock to FED Corporation
shareholders and issued approximately 3.9 million options and warrants in
exchange for existing FED options and warrants. The total purchase price of the
transaction was approximately $98.5 million, including $73.4 million of value
relating to the shares issued (at a fair value of $7 per share, the value of a
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged and $3.8 million of
assumed liabilities. The transaction was accounted for using the purchase method
of accounting. Under the purchase method of accounting, the assets and
liabilities were recorded based upon their fair values at the date of
acquisition as determined by an independent appraisal.
The purchase price was allocated as follows: (in millions)
Deferred compensation $13.0
In-process research and development 12.8
Fixed assets 1.2
Other intangible assets 16.9
Goodwill 54.6
----
$98.5
-----
38
We amortize goodwill and other intangible assets acquired over their
estimated useful lives of three years. We recorded approximately $20.9 million
in amortization expense related to purchased intangible assets for the year
ended December 31, 2000. In accordance with Statement of Financial Accounting
Standards No. 2, "Accounting for Research and Development Costs", as clarified
by Financial Accounting Standards Board Interpretation No. 4, amounts assigned
to in-process research and development are to be charged to expense as part of
the allocation of purchase price. The amount allocated to acquired in-process
research and development related to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility and may not develop into
products that may be sold by us.
For the three years prior to the acquisition of FED Corporation,
Fashion Dynamics Corporation had no active business operations. Management
believes that the comparison of eMagin's financial results to that of the
operating entity (FED Corporation) provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
reflects the operating results of FED Corporation for all periods prior to the
merger and it should be read in conjunction with the consolidated financial
statements and notes thereto of this prospectus. The comparison of financial
information below for the period ended December 31, 2000 reflects pro forma
results of eMagin for the period January 1, 2000 through December 31, 2000 and
its predecessor FED Corporation for the period January 1, 2000 to March 15,
2000, on a combined basis, such that the amounts presented and discussed reflect
the full year of operations for each period. Reference is made to our
consolidated financial statements that are included herein for further detail on
the results of eMagin and FED Corporation for their respective periods of
ownership.
Our history has been as a developmental stage company. We intend to
significantly increase our marketing, sales, and research and development
efforts, and expand our operating infrastructure. Most of our operating expenses
will be fixed in the near term. If we are unable to generate significant
revenues, our net losses in any given quarter could be greater than expected. As
a result, you should consider our prospects in light of the early stage of our
business in a new and rapidly evolving market.
The following are descriptions of the revenue and expense components of
our statement of operations:
Net contract revenues currently represent revenues mostly from
contracts funded by U.S. government programs. We have historically earned
revenues from certain of our research and development activities under both
fixed-price contracts and cost-type contracts, including some cost-plus-fee
contracts. Revenues relating to fixed-price contracts are generally recognized
on the percentage-of-completion method of accounting as costs are incurred
(cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred
plus a portion of estimated fees or profit based on the relationship of costs
and the allocation of allowable indirect costs as defined by each contract. The
amount of revenues earned is dependent upon the execution of new government
contracts, which may not be predictable or consistent from period to period
because
39
of variations in government funds allocated to research and development in our
field of technology.
Research and development expenses represent salaries, development
materials, external contracts, equipment lease and depreciation expense,
electronics, rent, utilities and costs associated with operating our
manufacturing facility. These costs are expensed as incurred. We have received
cost sharing awards from certain U.S. government agencies to fund certain
research and development. Funding from this type of contract is recognized as a
reduction in research and development operating expenses during the period in
which the services are performed and related direct expenses are incurred. As of
December 31, 2000, the remaining amounts to be incurred and billed on these
active "cost sharing" contracts totaled $1.4 million.
Non-cash stock-based compensation expense represents expenses
associated with stock option grants to our officers and employees at below fair
market value as additional compensation for their services and to induce them to
lock-up their options for a longer time then would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
Amortization of purchased intangibles represents the cost of
amortization of the value of goodwill and other acquired intangible assets. The
purchased intangibles are amortized over their expected useful lives of three
years on a straight-line basis.
Selling, general and administrative expenses principally represent the
cost of salaries and fees for professional services, legal fees incurred in
connection with patent filings and related matters, depreciation and
amortization, and other administrative expenses as well as expenses associated
with marketing.
Basic and diluted net loss per common share is computed by using the
weighted average number of shares of common stock outstanding during the period,
restated for the effect of the merger upon the number of shares outstanding in
the current year, and for the presentation of the net loss per share for the
predecessor, a stock split effected during 1999. No common stock equivalents
have been included in the computation of weighted average shares outstanding, as
their effect would be anti-dilutive.
40
Results of Operations
Comparison of our financial results for the years ended December 31,
1998, 1999 and 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased to $3.1 million for the year ended December 31, 2000
from $1.9 million for the year ended December 31, 1999, representing an increase
of 63%. This increase was due primarily to the recognition of revenue from
certain government contracts relating to head-wearable displays.
Research and Development Expenses
Gross research and development expenses increased to $13.3 million for
the year ended December 31, 2000 from $11.2 million for the year ended December
31, 1999, representing a 17.7% increase. Of these amounts, we received $1.5
million in cost sharing from the U.S. government for the year ended December 31,
2000, and $1.1 million for the year ended December 31, 1999. The $2.1 million
increase in gross expenses for the year ended December 31, 2000 reflects the
additional costs associated with personnel costs, equipment leases,
depreciation, and material costs resulting from increased research and
development activities and equipment additions at our manufacturing facility.
Non-Cash Stock-Based Compensation Expense
Non-cash stock-based compensation expense was $10.3 million for the
year ended December 31, 2000 versus no activity for the year ended December 31,
1999. The activity, for the year ended December 31, 2000, reflects the
amortization of deferred compensation costs related to the issuance of stock
options, warrants issued and re-priced warrants and options at below fair market
values in the first quarter of 2000.
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense increased to $20.9
million for the year ended December 31, 2000 from $0.8 million for the year
ended December 31, 1999. The $20.1 million increase in amortization for
purchased intangibles expense is the result of non-cash charges related to the
amortization of goodwill and intangibles created by the merger.
Acquired In-Process Research and Development
In connection with the merger, we allocated $12.8 million of the
purchase price to acquired in-process research and development. Accordingly,
these costs were expensed during the year upon finalization of a third party
appraisal.
41
General and Administrative Expenses
General and administrative expenses increased to $6.1 million for the
year ended December 31, 2000 from $5.2 million for the year ended December 31,
1999, representing a 17.3% increase. The $0.9 millio