<PAGE>
[GRAPHIC OMITTED]
CONSTELLATION 3D, INC.
2001 ANNUAL MEETING OF SHAREHOLDERS
ANNUAL REPORT
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Forward Looking Statements ........................................................... 1
Risk Factors ......................................................................... 2
Our Business ......................................................................... 8
Company History and Structure ........................................................ 8
Products ............................................................................. 11
Distribution and Principal Markets ................................................... 11
Intellectual Property ................................................................ 15
Competitive Conditions and Methods of Competition .................................... 17
Selected Consolidated Financial Data ................................................. 22
Selected Quarterly Financial Data .................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations 24
Index to Financial Statements ........................................................ F-1
</TABLE>
<PAGE>
Except where the content indicates otherwise, references in this Report to
"C3D," the "Company," "we," "us," and "our" refer to Constellation 3D, Inc.
FORWARD LOOKING STATEMENTS
Some of the information in this Report may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. You can identify these
statements by the appearance of words and phrases such as "will likely result,"
"may," "believes," "are expected to," "is anticipated to," "is forecasted to,"
"is designed to," "plans to," "predict," "seek," "estimate," "projected,"
"intends to" or other similar words and phrases. Important factors that could
cause actual results to differ materially from expectations include:
o failure to raise sufficient capital to fund business operating plans;
o market conditions and demand for new data storage technology;
o the competitors' ability to successfully develop new technologies to
satisfy demand for data storage;
o difficulties in achieving sales, gross margin and operating expense
targets based on competitive market factors;
o difficulties in competing successfully in the markets for new products
with established and emerging competitors;
o difficulties with single source supplies, product defects or product
delays;
o difficulties in forming and maintaining successful joint venture
relationships;
o difficulties in negotiating and receiving licensing royalties;
o difficulties in obtaining, maintaining and using intellectual property
protections;
o changes in data storage technological protocols and standards;
o volatility in interest rates and currency exchange rates;
o difficulties in state, federal, foreign and international regulation and
licensing requirements;
o economic and political instability in the foreign countries where we
conduct operations;
o litigation actions by directors, employees, investors and others;
o limited operation and management history;
o dependence on key personnel;
o other factors discussed in the Report.
All of the above factors could cause our actual results to differ
materially from historical results and those presently anticipated. When
considering forward-looking statements, you should keep these factors in mind
as well as the other cautionary statements in this Report, including without
limitation the "Risk Factors" on page 2.
1
<PAGE>
RISK FACTORS
We have no history of revenue, and expect to continue to incur operating losses
until late 2002.
As a research and development company, we have no revenue history and
therefore we have not achieved profitability. We expect to continue to incur
operating losses until late in the third or fourth quarter of 2002. We incurred
a net loss of $15,263,959 for the nine months ended September 30, 2000,
$4,866,687 for the year ended December 31, 1999 and $3,191,902 for the year
ended December 31, 1998. We have never generated profits, and there is no
assurance that, in the future, we will be profitable on a quarterly or annual
basis. In addition, over the next twelve months, we plan to increase operating
expenses from approximately $800,000 per month to $1,100,000 per month in order
to fund research and development and increase administration resources.
However, we expect to receive revenues by the end of the second quarter of
2001. Nevertheless, it is possible that our revenue may never be sufficient to
recognize a profit.
We have a limited operating history that began in 1997 and may encounter
difficulties typical to new operations.
Some of our subsidiaries began operating in January of 1997, when they
continued to perform research and development of three-dimensional technology
for the storage of digital information on disc that our scientists had begun in
1995.
Since we are a new operation, we may encounter problems, expenses,
difficulties, complications, and delays typical to new operations. Primarily,
there is the risk that we may not be able to transform the technology that we
developed into commercially profitable products. Also, there is the risk that
once another company or we introduce the products into the market place, the
market will not accept or adopt our products.
We frequently will need to raise large amounts of additional capital to sustain
operations, and we cannot assure you that we can continue to raise sufficient
capital when we need to do so.
We believe that we have sufficient working capital to sustain operations
through September 2001. However, because we are a research and development
company in the data storage technology field, we continually expend large
amounts of capital over short periods of time. We currently do not generate any
revenues and do not expect to do so until the end of the second quarter of
2001. We cannot assure you that any revenues generated in the future, if any,
will be sufficient to finance the complete cost of our research and
development. We will require additional funds before we achieve positive cash
flow from operations. Our future capital requirements and profitability depend
on many factors, such as the timely success of product development projects,
the timeliness and success of joint venture and corporate alliance strategies
and our marketing efforts. We are actively in the process of raising additional
capital, including the issuance of warrants and convertible debt securities and
the potential issuance of preferred shares. Our outstanding convertible debt
does not materially adversely affect our liquidity. However, future debt or
preferred share offerings could result in restrictions that could make payments
of such debts difficult, create difficulties in obtaining future financings,
limit our options for changing the business and cause substantial cash flow
problems. We cannot assure you that additional financing or additional funds
will be available when we need them or, if available, on terms acceptable to
us. Any additional stock or convertible debt financing which we obtain, if any,
could result in substantial dilution to shareholders. We are not currently
considering acquiring a bank line of credit.
We and our contractor conduct operations in countries with a recent history of
economic and political instability.
In addition to our activities in the United States, we conduct business
operations in Israel and Russia. Additionally, we have hired a subcontractor to
perform various activities in the Ukraine. In recent history, these three
nations have experienced significant economic and political instability. It is
possible that present or future economic or political instability in these
nations will have a material adverse impact on our ability to conduct business
or on our financial condition.
2
<PAGE>
Economic instability in the foreign nations in which we operate might result
from or lead to inflation, high interest rates and social unrest which could
adversely affect our operations and performance.
Economic instability may encompass unstable price levels such as
inflation, unstable interest levels or rates, such as fluctuation of capital,
and social unrest that could adversely affect our operations and performance.
The rate of inflation in Israel, Russia and the Ukraine has not materially
adversely affected our financial condition. It is impossible for us to predict
whether the rate of inflation in Israel, Russia or the Ukraine will materially
adversely affect our future financial condition. However, we believe that it is
possible that such adverse effects might result in the future. On numerous
occasions in the past, high rates of inflation have occurred in Israel, Russia
and the Ukraine. High inflation may reoccur in the future, causing insecurity
and uneasiness in the local populace in general, including our employees. In
these situations, there is often concern about the increasing cost of living
and attempts to keep pace with it. This situation by itself might adversely
affect our performance. Whenever the currency exchange rate does not
proportionally match inflation, as it has happened as a matter of governmental
policy in such countries as Israel, Argentina, and Russia, generally there is
an increase in the costs to us in U.S. dollars. Such increases in costs might
materially adversely affect our financial condition. Presently, we do not have
a hedging policy for protection against changes in the dollar costs of our
activities.
Changes and fluctuations in interest rates might affect our operations in
Israel, Russia and the Ukraine. The changes in interest rates might create
either investment or disinvestment that might affect the economy of an entire
country, and thus also our employees. Because we finance most of our non-U.S.
operations in U.S. dollars, and since we expect that this financing will
continue in the future, we believe that local interest rate fluctuations will
not have a material adverse impact on our financial condition.
The economic situation in Israel, Russia and the Ukraine might eventually
develop into extended social unrest. Such social unrest might materially
adversely affect both the financial performance of our local as the well as the
overall operations.
Political instability in the foreign nations in which we operate might result
from or lead to military confrontation, frequent changes in national
governments, terrorism and corruption which could adversely affect our
operations and performance.
We do not possess political risk or other insurance to protect against
business interruption losses caused by political acts.
Israel's physical security and integrity have been at risk since Israel's
inception as a modern nation. Israel and Syria have attempted to restart peace
negotiations. However, there is no formal peace between Israel and Syria or
Lebanon. Additionally, there are conflicts between Israel and Iraq and between
Israel and Iran. Israel and the Palestinian Authority have been conducting
negotiations regarding the legal status of the West Bank, Gaza Strip and
Jerusalem, the current Israeli capital. In connection with those negotiations
and their results, violent activity has occurred, and may reoccur. Therefore,
to the extent that we have operations in Israel, there is a risk that the
political instability will have an adverse impact on our ability to conduct
business. It is highly unlikely, but possible, that Israel's compulsory
military service obligation for its citizens, which lasts until an individual
is 55 years of age, could disrupt the scheduled work of the Israeli research
and development facility. This obligation could delay the commercial launch of
the planned volumetric storage product line and materially adversely affect our
results of operations and financial condition.
Russia's significant political and economic instability could have a
material adverse effect on the results of our operations and the market price
of our stock. Russia has incurred significant debt, which it may fail to repay
on a timely basis. Russian currency, the ruble, has encountered foreign
exchange volatility. The Russian government has experienced frequent political
instability and change, including wars inside Russia, acts of terrorism, power
struggles among government officials and among big commercial enterprises. In
recent years, the Russian former president replaced prime ministers frequently,
and parties with radical positions regarding intervention of the government in
the economy, like the Communist Party, have gained in influence. We do
3
<PAGE>
not believe that these activities have had a materially adverse effect on us.
However, in the future, such factors may have a material adverse effect on our
operations. Difficulties in protecting and enforcing our rights and future
changes to local laws and regulations could adversely affect our ability to
conduct operations in Russia.
Additional strains on the local operations might result from other
factors, such as the delay of Moscow banks in acknowledging wire transfers of
funds into Russia. These delays can range from a day to a week. Also, Moscow
banks often charge very expensive and somewhat arbitrary fees for wire
transfers.
Our activities in the Ukraine are limited to the operations of a single
subcontractor. As Russia, the Ukraine has experienced significant political and
economic change. The Ukrainian economy is less developed than that of Russia
and is susceptible to most of the same economic risks as Russia, including
governmental debt defaults or restructurings, currency restrictions, foreign
exchange volatility and political instability. Economic or political
instability in the Ukraine might have a material adverse impact on our ability
to conduct business or on our financial condition.
We do not enter into derivative transactions to hedge market risk in Russia,
Israel or the Ukraine, and market fluctuation may adversely affect our
Ukrainian, Israeli and Russian operations.
We cannot provide any assurance that future developments in each
respective country will not generally have an adverse effect on our financial
condition. Therefore, we do not anticipate that we will enter into derivative
transactions, such as foreign currency forward or option contracts, to hedge
against known or forecasted market changes.
We may require additional technology in order to successfully develop and
license our technology.
We believe that we have developed a substantial amount of technology for
our products. Nevertheless, if we cannot develop the additional technology that
we need to be able to sell the products, we may have to purchase technology
from others. We cannot promise or accurately forecast whether we will succeed
in performing these acquisitions.
We depend upon, and could become unable to maintain or attract, knowledgeable
and experienced personnel vital to our financial success.
In order to succeed, we depend upon our ability to attract and retain
highly qualified technical and management personnel, including experts in the
field of data storage technology and the sciences underlying such technology.
These individuals are in high demand and are often subject to competing offers.
We face competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. We cannot
assure you that we will be able to attract and retain other qualified personnel
we need for the business. Furthermore, we do not currently maintain "key man"
insurance for any personnel.
Provisions of corporate law and our articles of incorporation could deter
takeover attempts.
The provisions of the corporate law of our state of incorporation and our
articles of incorporation could make it more difficult for a third party to
acquire control of us, even if the change of control would benefit the
shareholders.
We cannot assure you that we will successfully protect our Fluorescent Memory
Technology and enforce our intellectual property rights.
Although we intend to rely on trade secret, trademark, copyright and other
intellectual property laws to protect our Fluorescent Memory Technology, we
currently rely almost entirely on patent laws for protection. While we intend
to vigorously enforce our intellectual property rights, we cannot assure you
that the steps taken to protect the Fluorescent Memory Technology and to
enforce the rights will be successful. Through our wholly owned subsidiary,
TriDStore IP, L.L.C., as of October 4, 2000, we individually held nine U.S.
patents, more than fifty U.S. and foreign regular patent applications, eleven
pending U.S. provisional patent
4
<PAGE>
applications and twelve international patent applications pursuant to the
Patent Cooperation Treaty. We cannot assure you that we will timely exercise
the right to convert provisional or PCT patent applications into regular or
international patent applications or that patent authorities will issue patents
for any regular or international patent applications.
We expect to develop trade secrets and may seek patent or copyright
protection for trade secrets. We cannot assure you that we will develop trade
secrets or seek patent or copyright protection for any or all of them. We
intend to enter into confidentiality and non-disclosure agreements to protect
one or more trade secrets which we or our employees or independent contractors
may develop, but we cannot assure you that we will do so or that the
appropriate parties will maintain the confidentiality necessary to protect our
trade secrets. A failure to maintain one or more trade secrets could have a
material adverse financial impact on us.
We may offer products in the U.S. and in foreign countries based on the
patented Fluorescent Memory Technology. However, certain countries in the
Pacific Rim and elsewhere may not offer the same degree of intellectual
property protection that the U.S., European Community and Japan afford.
Therefore, we may be unable to enforce its patent rights in those
jurisdictions, even if we are able to obtain intellectual property rights.
We have filed intent to use trademark applications with the U.S. Patent
and Trademark Office for the trademarks "CLEARCARD" and "CONSTELLATION 3D". We
cannot assure you that these applications will mature into registrations or
that we will even use these marks. Furthermore, we acquired the internet domain
names "C-3D.NET," "C-TRID.COM," "C-TRID.NET", "C3DINC.COM",
"CONSTELLATION3D.COM", and "CONSTELLATION3D.NET". Currently, we maintain a web
site at http://www.c-3d.net.
We cannot guarantee that any patents, copyrights, trade secrets,
trademarks or domain names that we developed or obtained will provide
sufficient value or protection to us. Furthermore, we cannot assure you that
other parties will not challenge the validity or that other parties will not
assert affirmative defenses to infringement or dilution. If another party
succeeds in developing data storage technology comparable to Fluorescent Memory
Technology without infringing, diluting, misusing, misappropriating or
otherwise violating our intellectual property rights, our financial condition
may materially suffer.
Due to potential intellectual property claims and litigation that parties may
initiate against us, we may suffer economic losses and become unable to
research, develop or license the sale or manufacture of the technology.
As is typical in the data storage industry, other parties may in the
future notify us of claims that may be infringing, diluting, misusing,
misappropriating or otherwise violating our intellectual property rights. It is
impossible to predict the outcome of such potential claims, and we cannot
assure you that the relevant authorities will resolve the potential claims in
our favor. We also cannot assure you that an unfavorable resolution of a claim
will not have a material adverse effect on our business or financial results.
In particular, there has been significant litigation in the data storage
industry relating to infringement of patents and other intellectual property
rights. We cannot assure you that future intellectual property claims will not
result in litigation. If another party were to establish infringement,
dilution, misuse, misappropriation or any other intellectual property rights
violation, we or our joint ventures might have to pay substantial damages, or
courts might enjoin us from developing, marketing, manufacturing and selling
the infringing product(s) in one or more countries. In addition, the costs of
engaging in intellectual property litigation can be substantial regardless of
outcome. If we seek licensure for intellectual property that we cannot
otherwise lawfully use, we cannot assure you that we will be able to obtain
such licensure on satisfactory terms.
We might not own intellectual property that we believe we own or that we need
in order to successfully research, develop and license our technology.
In the future, a court, patent office or other authority may deem one of
our employees or contractors and not us to be the legal owner of one or more
patents, patent applications or other intellectual property, which is material
to protecting our data storage technology. We typically require that our
employees and contractors assign to us all right, title and interest in and to
the intellectual property that was developed for us. However, we cannot assure
you that we will obtain legal ownership of one or more licenses to use the
intellectual
5
<PAGE>
property, which an authority deems to be the property of our employee or
contractor, on satisfactory terms. Our failure to obtain the legal ownership
of, or one or more licenses to use, the intellectual property may have a
material adverse effect on our business or financial results.
We may eventually face inherent business risk of exposure to product liability
claims.
Our business may confront allegations that the use or misuse of our future
products caused the death or injury of a customer, consumer or user or to have
had some other adverse effect. We do not presently have product liability
insurance. Currently, our technology is not mass manufactured and we do not
expect that anyone will mass manufacture our technology in the near future.
Possible future product liability lawsuits may affect the reputation of our
future products and services or otherwise diminish our financial resources even
though we may obtain product liability insurance. We may protect ourselves
against product liability claims by contractually requiring the joint ventures
and licensees:
o to have continuous quality control inspections, detailed training and
instructions in the manufacture of our products;
o to indemnify us for damages caused by tortuous acts or omissions of the
joint venture or licensee; or
o to obtain and maintain adequate product liability insurance.
If injured persons bring product liability suits, we cannot assure you
that any existing product liability insurance of a joint venture or any
existing indemnification by joint ventures will adequately cover the liability
claims. In addition, we cannot assure you that product liability insurance will
be available of joint ventures in sufficient amounts and at acceptable costs.
We may be unable to obtain sufficient components on commercially reasonable or
satisfactory terms.
It is common in the data storage technology manufacturing and assembly
industry for certain components to be available only from a few or sole-source
suppliers. However, we cannot assure you that the key components for future
products will be available from a number of source suppliers. Therefore, we and
joint ventures and licensees may experience difficulty in obtaining a
sufficient supply of key components on a timely basis. We intend to develop
relationships with qualified manufacturers with the goal of securing
high-volume manufacturing capabilities, thus controlling the cost of current
and future models of our future products.
We cannot assure you that we will be able to obtain a sufficient supply of
components on a timely basis or on commercially reasonable terms or realize any
future cost savings. The same supply and cost problems could adversely affect
our sales of products. The inability to obtain sufficient components and
equipment, to obtain or develop alternative sources of supply at competitive
prices and quality or to avoid manufacturing delays, could prevent joint
ventures from producing sufficient quantities of our products to satisfy market
demand. Additionally, in the case of a component purchased exclusively from one
supplier, joint ventures could become unable to produce any quantity of the
affected product(s) until such component becomes available from an alternative
source. These problems could cause delays to product shipments, thereby
increasing the joint venture's material or manufacturing costs or causing an
imbalance in the inventory levels of certain components. Moreover, difficulties
in obtaining sufficient components may cause joint ventures and licensees to
modify the design of our products to use a more readily available component.
These design modifications may result in product performance problems. Any or
all of these problems could result in the loss of customers, provide an
opportunity for competing products to achieve market acceptance and otherwise
adversely affect our business and financial results.
We may become financially dependent on one or a small number of customers.
Because we are a research and development company, we have not developed a
customer base for our products. We intend to establish joint ventures and
licensing arrangements with strategic partners to market and sell Fluorescent
Memory Technology. In the future, it is possible that we or joint ventures and
licensees will have sales to one or a small number of customers which equal ten
percent or more of our consolidated revenues. However, we do not intend to
become financially dependent on one or a small number of customers with whom we
do most or all of its business.
6
<PAGE>
Our officers spend time on projects that bear no relation to our activities.
Some of our officers, notably Leonardo Berezowsky and Michael Goldberg,
serve as directors, officers and employees of other companies. While we believe
that the officers will be devoting adequate time to effectively manage us, we
cannot assure you that their other positions will not negatively impact their
duties and that the impact will not have a material adverse effect on our
financial condition. We believe that the other company positions of our
officers do not raise actual or potential conflicts of interest that could
interfere with the carrying out of their respective duties at our company.
Our expected products may be subject to various legal and regulatory controls.
We are unaware of any particular electrical, telecommunication,
environmental, health or safety laws and standards that will apply to our
products. While we do not anticipate special regulations of our products, we
cannot assure you that we will not have to comply with laws and regulations of
domestic, international or foreign governmental or legal authorities.
Compliance with these laws and regulations could have a material adverse affect
on us. The Federal Communications Commission (FCC) regulates computer hardware
that contains or utilizes magnetic forces to store information. If the FCC in
the future chooses to regulate fluorescent-based computer storage devices, such
as our products, compliance with those regulations could have a material
adverse effect on our financial condition.
We face intense competition in the data storage technology industry.
We estimate that there are approximately 14 enterprises currently
researching, developing or producing other types of data storage technology,
which we consider to be our material competitors. The data storage technology
industry is fiercely competitive, and a number of our competitors, such as EMC
Corporation, Iomega Corporation and Seagate Technology, Inc. have already
established their names, brands, products and technologies in the marketplace.
We expect that some competitors will continue to have significant market
shares. Our competitors may further increase their market shares through
mergers, acquisitions and research and development.
While we believe that Fluorescent Memory products and joint venture and
licensing strategies will result in competitive advantages, we cannot assure
you that we will obtain or maintain any of such advantages over time.
Furthermore, we cannot assure you that a competitor will not invent a superior
technology, or that our products and services will be able to penetrate the
data storage market. Many of our current and potential competitors have or may
have advantages over us such as greater financial, personnel, marketing, sales
and public relations resources. Existing or future competitors may develop or
offer products that provide significant performance, price, creative or other
advantages over products that we offer.
7
<PAGE>
Our Business
We are a development stage company engaged in a research and development
program to launch the mass-market production of a technology called Fluorescent
Memory Technology (also known as Fluorescent Media Disc and Florescent Memory
Card Technology, FMD and FMC Technology, FMD/C Technology and by other
substantially similar names). We began operations as of October 1, 1999 and
have no prior operating history other than that associated with the acquisition
of certain assets of Constellation 3D Technology Limited, a British Virgin
Islands company (Constellation Tech), which primarily performed research and
development of three-dimensional technology for the storage of digital
information on disc. However, our subsidiaries were in operation before October
1, 1999, when Constellation 3D Holdings Limited, an Irish company
(Constellation Holdings) or Constellation Tech owned them.
We have no revenue history and therefore have not achieved profitability.
We are an international enterprise headquartered in New York, New York. With
operations in the United States, Israel and Russia and a subcontractor who
performs services for us in the Ukraine, we research and develop data storage
technology products for commercial applications.
Our mission is to develop state-of-the-art technologies and products to
serve the growing data storage needs of customers in government, business,
education and consumer segments through continuous research and product
innovation. By providing new data storage solutions to our customers through
joint ventures, strategic alliances, and licensing agreements, we intend to
have a substantial presence in the data storage research and development market
and thereby provide significant returns to our shareholders.
Our new technology focuses upon the concept of the volumetric storage of
information. FMD Technology records data on multiple layers located inside a
disk or a card, as opposed to the single or double layer method available in
compact discs and DVDs. The recording, reading and storing of the information
uses fluorescent materials embedded in pits and grooves in each of the layers.
The fluorescent material emits radiation when excited by an external light
source. The FMD Technology then decodes the information as modulations of the
intensity and color of the emitted radiation.
Our research has determined that these fluorescent multilayer disks and
cards furnish the user with considerably improved storage space and storage
time and deliver substantial performance advantages when compared to the CDs
and DVDs currently produced.
Company History and Structure
Our founder incorporated us on December 27, 1995 under the name Latin
Venture Partners, Inc. The name of Latin Venture Partners, Inc. changed to C3D
Inc. on March 24, 1999 in anticipation of a transaction with Constellation
Tech. As approved by the necessary number of votes at our Annual Meeting of
Shareholders held on December 27, 1999, we changed our name to Constellation
3D, Inc. effective December 29, 1999. From our inception on December 27, 1995
until October 1, 1999, we have had no business operations.
On October 1, 1999, we purchased certain assets of Constellation Tech for
total consideration of 29,250,000 shares of our common stock and our assumption
of substantially all liabilities and obligations of Constellation Tech (the
"Acquisition").
In the Acquisition, we acquired the following assets:
o Constellation's Tech's then sole existing membership interest in
TriDStore IP, L.L.C.;
o all of the issued and outstanding ordinary shares in TriD Store Vostok;
o 99 of the 100 allotted shares of C-TriD Israel Ltd.; and
o all of the issued and outstanding shares of common stock of TriD SV,
Inc.
8
<PAGE>
TriDStore IP, L.L.C. is a Delaware limited liability company formed on
February 2, 1998, formerly known as OMD Devices, L.L.C. until March 9, 1999.
TriDStore IP, L.L.C. owns a substantial majority of our material intellectual
property which consists mostly of patent registrations and applications. See
"Risk Factors" on page 2.
TriD Store Vostok is a Russian company formed on January 15, 1999. We
conduct our Russian operations through TriD Store Vostok.
C-TriD Israel Ltd. is an Israeli company formed on December 2, 1996. We
are now the owner of all outstanding shares of C-TriD Israel Ltd. We conduct
our Israeli operations through C-TriD Israel Ltd.
TriD SV, Inc. is a Delaware corporation formed on August 10, 1998. As of
October 20, 2000, TriD SV, Inc. has had no operations.
On February 8, 2000, we formed Constellation 3D Trust LLC, a Delaware
limited liability company that we wholly own. We then issued 10,500,000 (Ten
Million Five Hundred Thousand) shares of common stock to Constellation 3D Trust
LLC as a capital contribution and later cancelled all but 500,000 (Five Hundred
Thousand) of said shares. Constellation 3D Trust LLC intends to use the 500,000
(Five Hundred Thousand) shares to raise debt or equity capital and contribute
the proceeds thereof to us, which proceeds will be used for general corporate
purposes. There is no assurance that the issuance of the shares will result in
the raising of any debt or equity capital.
On April 7, 2000, we formed FMD&E, Inc., a Massachusetts corporation that
we wholly own ("FMD&E"). We formed FMD&E after we decided not to consummate the
acquisition of Reflekt Technology, Inc., a Massachusetts corporation. Since
April 2000, FMD&E has been designing fluorescent multi-layer production
equipment.
9
<PAGE>
<TABLE>
ORGANIZATIONAL STRUCTURE
OF THE
CONSTELLATION 3D, INC. ENTERPRISE
-----------------------------
CONSTELLATION 3D, INC.
(Florida, USA)
(Headquartered in
New York, New York, USA)
-----------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100% 100%
--------------- ------------------ ----------------- --------------- ----------------- ---------------
TriDStore, IP, TriDStore C-TriD Israel Ltd. TriD SV, Inc. Constellation 3D FMD&E, Inc.
L.L.C. Vostok (Israel) (Delaware, USA) Trust LLC (Massachusetts,
(Delaware, USA) (a.k.a. 3-D Vostok (Delaware, USA) USA)
ZAO) (Russia)
--------------- ------------------ ----------------- --------------- ----------------- ---------------
</TABLE>
10
<PAGE>
Products
We have developed FMD and FMC Technology and, through licensing and/or
joint ventures, plan to use it to introduce the following products:
1. First Generation Discs and Cards
a. Read Only Memory (ROM) Products
o FMD-ROM. We expect that this class of products will take the form
of a disc, with data storage capacities of up to 100 Gigabytes
(GB). It should include red laser-based disc/drive units that are
also capable of reading CDs and DVDs.
o FMC ClearCardTM-ROM. We expect that this class of products will
take the form of credit-card-sized card devices, with data storage
capacities of up to 5 GB.
b. Write Once Read Many Times (WORM) Products
o FMD-R (Recordable). We anticipate that this class of products will
take the form of a disc, with data storage capacities of up to 100
GB. We project that these products will include red laser-based
disc/drive units that are also capable of reading CDs.
o FMC ClearCardTM-R (Recordable). We expect that this product line
will be credit-card-sized cards, with data storage capacities up
to 5 GB.
We anticipate that the first prototypes of this technology will be
demonstrated by Summer 2001, and we expect that this technology will go beyond
ROM in offering a one-time recording function, allowing the user to choose the
data to be stored.
c. Rewritable (R/W) Products
o FMD-R/W. We expect that this line of products will be a 120 mm
disc with data storage capacities of up to 100 GB.
o FMC ClearCardTM-R/W. We anticipate that this product line will be
credit-card-sized cards, with data storage capacities of up to
5 GB.
We expect to be able to demonstrate this technology, by the end of 2001
and anticipate that the technology will allow multiple erasing and re-recording
of user-specified data.
2. Second Generation Discs & Cards
We anticipate the development of these products within 18 to 24 months
after the first generation. We estimate that the discs will have data storage
capacities up to 1 Terabytes (TB) (1,000 GB) and that the cards will have data
storage capacities up to 25 GB.
3. Hybrid ROM-R-R/W Discs and Cards
We believe that the multi-layer structure of our FMD/C media allows the
creation of hybrid memory devices, combining the advantages of Read-only,
Recordable and Rewritable memory.
Distribution and Principal Markets
We do not plan to normally engage in direct sales and distribution of
FMD/C products. Instead, we intend to partner with industry leaders having a
substantial sales and distribution capability within targeted market segments,
such as the PC Market, the Home Consumer Market, Digital Cinema, and Mobil
Computing. The primary exception would be with respect to market segments that
become evident as strategically important to our overall success, where we
intend to become more directly involved in the sales and marketing process.
We expect to receive revenues primarily through licensing and royalty
revenues, in accordance with our business model. We intend to establish royalty
rates by agreement with joint venture partners and technology licensees,
calculated as a percentage of the licensee's revenue generated -- a per-unit
price, or a flat fee. We
11
<PAGE>
expect to derive royalties from a percentage of the value to the licensee that
is attributed to our technology. Early in the product rollout, we may partially
waive royalties in order to help speed market introduction of the technology.
In general, we expect to set the price at the optimum level to achieve the
highest possible overall revenue return.
Based on the market penetration of CD and DVD, we believe that sales for
120 mm (CD/DVD-sized) FMD disc will come from 2 primary categories: the PC
Market and Home Consumer Market. A description of these market segments and
others follows.
The PC Market
The market size of the PC Market exceeds 200 million drives and includes
billions of discs. We believe that the market needs storage solutions past the
4.7 GB (or 8.54 GB dual layer) capacity currently offered by DVD-ROM and 4.6 GB
currently offered by DVD-R. The PC Market currently uses Compact Disc Read Only
Memory (CD-ROM), recordable CDs (CD-R), DVD-ROM and DVD-RAM formats.
The home and office personal computer market is one of the largest for
optical discs. It includes software (ROM) and personal storage (CD-R and R/W).
Annual worldwide demand for ROM discs is well over 1 billion units. In the past
2-3 years, due to the increased size of software applications, distribution of
software has moved from the floppy disc (holding 1.44 Megabytes (MB)) to the CD
(holding 650 MB), and is now starting to move to DVD (holding 4.7 GB).
The demand for storage in the PC ROM software market continues to grow as
applications such as games and encyclopedias add more multimedia and video
features. These changes have spurred the move from CD-ROM storage to DVD-ROM
storage, with FMD-ROM as the available format for applications requiring over
4.7 GB of capacity.
This trend is mirrored for recordable media, with annual CD-R disc
worldwide demand at 3.8 billion units. CD-R has now in fact become a commodity
product, with bulk prices close to $0.30 per disc and just a few firms, such as
Ritek Corporation and CMC Magnetics, controlling worldwide supply. The
DVD-recordable market is now beginning to increase substantially (despite the
format battles between DVD-R/W, DVD-RW+ and DVD-RAM), and is led by the need
for greater storage capacity in order to record and/or archive video & audio
content. We are developing, using current inexpensive red-laser-based FMD
media, discs with a capacity of up to 25 GB, giving a 5-fold increase in
recordable optical storage capacity.
For removable carriers, we plan to develop our FMC ClearCardTM in various
sizes, ranging from around 500 MB to about 5 GB. We believe that these cards
will initially service the portable computing market and later the office and
home computer desktop market.
Home Consumer Market
In the home video market, VHS tape is still the predominant format, but
the use of DVD in the United States and Europe is now occurring faster than
many experts had anticipated.
In the United States, DVD is approaching 10% market penetration, which
signifies rapid mass-market acceptance. Major movies are now being released
primarily or even exclusively in the format, and old celluloid classics are
being digitally re-mastered for DVD release.
We expect that our discs and cards will provide a suitable solution for
the distribution of films and other types of recorded information and may
replace the analog technology of VHS used in VCRs, portable applications to be
used in high-resolution hand-held movie players and in-car and in-plane
entertainment systems.
o HDTV
One important and growing market for removable storage carriers is high
definition television, also called HDTV. This high quality television format
has been gradually introduced in the United States, Europe and Asia. Format
issues have hampered the speed of introduction, but we think that certain
federal laws, including the requirement that all television broadcasts be made
digitally by 2006 make it increasingly likely that some form of the HDTV format
will be successful.
12
<PAGE>
The high pixel rate for HDTV requires relatively large data capacities and
transfer speeds to achieve the high quality definition the format allows.
Sonic Solutions and Ravisent Technologies Inc. have announced a new
format, called hDVD which they claim has up to four times the resolution of
standard DVD-Video titles for the HDTV market. However, some industry experts
believe that in order to truly enable the HDTV format, media with over 50 GB
memory capacity will be required.
We believe that we are the only company planning to offer a single carrier
solution for HDTV, and that we are therefore well positioned to be the
predominant storage carrier for HDTV playback.
o Personal Digital TV Recorders
The market for Personal TV recorders potentially will exceed 200 million
players and billions of discs. We estimate that the data storage market needs
storage solutions with storage capacities greater than 50 GB for both ROM and
recordable data storage. Currently, the personal digital TV recorder market
uses DVD-R, DVD-RAM and hard disc.
TiVo Inc. and Replay Networks Inc. currently supply the market for digital
personal television recorders, with units containing hard discs with capacities
up to 30 GB. We perceive the biggest problem, even with the recording of
non-high definition television, to be what to do when the disc is full. With
removable FMD-R discs, with expected capacities up to 100 GB, consumers will be
able to record many hours of entertainment and keep the recorded discs for
subsequent replay as desired. In addition, we expect the FMC-R ClearCard to
offer the same functionality for compressed information. We also expect both
the FMD-R disks and cards in mobile applications such as hand-held players.
As these formats reach mass-market acceptance, we anticipate that they
could require the production of large quantities of FMD discs annually.
Digital Cinema
The digital cinema market consists of approximately 34,000 screens
nationwide, and approximately 133,000 worldwide, with 75% of non-digital
screens expected to convert to digital within 10 years. We believe this market
requires a single disc with more than 100 GB of capacity and more than 50
megabits per second read speed. Currently, the digital cinema market lacks a
standard format.
Digital progress is on the verge of making fundamental changes in the film
industry. Leaders in the industry and electronics firms have been developing a
new "electronic cinema" to replace the celluloid movie reel. Joe Butt, director
of entertainment and technology strategies at Forrester Research, Inc., states
that the new digital projectors will be common in movie theaters within three
years, and will become the new standard by 2007.
Digital Cinema technology represents enormous benefits over celluloid
reels and projectors in the areas of convenience, units costs savings, and
quality. The Digital Cinema era will offer advantages such as the shorter
lead-time in bringing films to market and switching times on changing
projectors over from one film to another. The cost of each celluloid reel is
about $2,000.
The cost savings potential is extremely large when one considers that
there are about 5,000 prints shipped domestically and more worldwide on most
major films. Delivery costs and time only exacerbate the situation. According
to the National Association of Theater Owners, Digital Cinema could save the
industry up to $600 million per year.
Director George Lucas and Lucasfilm Ltd. are pioneering the transition to
Digital Cinema. Lucasfilm Ltd. financed the first digital projectors to be used
in theaters. In May of 1999, the much anticipated "Star Wars: Episode I -- The
Phantom Menace" debuted on Digital Cinema projector.
We believe some hurdles still need to be overcome in the development of
Digital Cinema on a broad scale. These include data storage capacity and read
times -- issues which we believe we are well positioned to address. The digital
cinema industry is one marketplace that we believe will be an early adopter of
our technology.
13
<PAGE>
Mobile Computing
In this growing arena, we are targeting:
o The wireless digital telephone market;
o Personal Digital Assistants;
o Ebooks; and
o GPS systems.
o Wireless Digital Telephone Market
We believe that personal digital assistants, also called PDAs, and cell
phones are on a quick path of convergence. The key participants in the wireless
digital telephone market are the service providers such as ATT Corp., Sprint
Communications Company, L.P., and MCI WorldCom, Inc., and the equipment vendors
such as Nokia Corp., Ericsson LM Telephone Co., and Motorola Inc.
We see third generation (3G) mobile telephone networks as an evolutionary
step up from today's second generation digital mobile systems. We expect that
3G media telephones and communicators will have multimedia messaging
capabilities which will include still imaging, video calls and video streaming,
wireless Internet browsing and speech. We anticipate that users will have their
own personal, mobile, multi-media communications service.
All of these enhanced features will demand greater data storage capacity
and performance. This demand, however, must be balanced with mobility. As a
result, storage media must be of a compact nature to serve this market. We
realize the value of this 3G technology and we intend to capitalize on it, by
partnering with the companies that are instrumental in developing it.
It is difficult to predict how many consumers will become 3G subscribers
as the technology develops, but Lucent Technologies, a leading provider of
telecommunications products and services, predicts that there will be more than
175 million subscribers for wireless data services by 2005.
o Personal Digital Assistants
We think that the PDA market represents a market segment with vast
potential for our FMD/C technology. We expect that as more functionality
ranging from multimedia applications to personal communications is built into
PDAs, the PDA unit's demand for digital storage will grow substantially.
The Strategis Group anticipates substantial growth in the markets of PDA
computing and smartphones, phones wirelessly connected to the Internet. Palm,
Inc., a majority-owned subsidiary of 3Com Corporation, is the leading global
provider of hand-held computing devices. Psion PLC, Sony Corporation and
Microsoft Corporation, in conjunction with Sharp Electronics Corp., Hewlett
Packard Company and others, are other major players in this segment.
o Memory Used in Mobile Computing
The combined market for all hand-held devices requiring data storage is in
the hundreds of millions of units. The Mobile Computing Market requires high
capacity, small size and low power usage.
The most common memory storage carrier in the mobile computing market is
flash memory. According to recent Merrill Lynch & Co., Inc., estimates, this
represents a $15 billion market. Currently, flash memory is limited to less
than 200 MB per unit and costs about $2,000 per GB. Flash memory is a R/W
technology that enables the user to continuously operate the unit without the
frequent change of storage media. It is designed specifically to address the
storage requirements of emerging applications in the consumer electronics and
industrial/communications markets such as digital cameras, personal digital
assistants, portable digital music players, digital video recorders and smart
phones, communications routers and switches and wireless communications base
stations. SanDisk Corporation dominates the flash memory market, and Sony
Corporation has now entered it with its Memory Stick product.
14
<PAGE>
IBM Corp. introduced its new hard disc based microdrive PCMCIA card in a
second mobile computing data storage carrier. We project that this drive will
initially cost hundreds of dollars.
Last, DataPlay, Inc. is developing a compact DVD-technology-based optical
data carrier for use in hand-held devices.
We believe that our recordable FMC ClearCard will seriously compete with
flash memory, hard disc microdrives and DVD-technology-based carriers. We
project that our 5 GB FMC-R will cost significantly less per unit to produce in
volume and could thereby retail for lower prices. We hope to obtain a
significant portion of these markets.
Corporate Data Storage, Internet Streaming, Video On Demand and Video
Archiving
o Corporate Data Storage
As companies store and analyze more data on transactions, customers, and
operational and financial parameters, the corporate sector represents a
substantial and growing portion of the demand for data storage. Applications
such as storage area networks, data warehousing, supercomputing, Internet
streaming and data mining are projected to require ever-greater capacity in
order to handle the volume of data to be processed.
International Data Corp. reported that the demand for corporate data
storage has been growing at more than 80% yearly for the past four years and
will double annually for several years to come. Industry estimates predict that
the average Fortune 500 company database size is anticipated to grow to 6.5 TB
in 2002 from today's average size of 672 GB.
o Internet Streaming and Video on Demand
As users of the Internet -- both corporate and individual - move toward
high-bandwidth connection (via optical fiber channels, ADSL (Asynchronous Data
Subscriber Line) and cable modems), very large amounts of video data will be
transferred from server to end-user. We believe that at both ends, high
capacity data storage carriers will be required. We expect that the Internet
server and corporate recipient markets will use our products.
o Video Archiving
The market requires terabytes of storage at a cost lower than that of a
random array of inexpensive discs (also known as RAID). Major vendors such as
Oracle Corporation, IBM Corp., EMC Corp. and SAP AG provide video archiving
solutions. Movie studios and broadcast corporations have data archiving
capacity requirements of up to several Pentabytes (1,000 TB, also known as PB).
We expect that our 100 GB FMD-ROM and FMD-R discs will greatly ease the
burden on providers of corporate data storage and video archiving storage
facilities, both in terms of cost and size of facility.
IBM Corp. and EMC Corp. are the main technology providers in this field
with RAID, optical jukeboxes or tape systems. They now offer a cost per 100 GB
of approximately $600 for their high-end systems. We believe that 100 GB FMD-R
discs can be produced in volume for significantly lower prices per unit than
those other technologies.
Intellectual Property
Through our wholly owned subsidiary TriDStore IP, L.L.C., as of October 4,
2000, we own the following U.S. patents:
o U.S. Patent No. 5,847,141, entitled "Photochromic Material for
Electro-Optic Storage Memory," which issued on December 8, 1998 and which
expires on December 22, 2015. This patent covers photochromically modified
pyridones which are useful in three dimensional, stable, optical memory
storage devices.
15
<PAGE>
o U.S. Patent No. 5,936,878, entitled "Polymeric Photo-Chromic
Composition," which issued on August 10, 1999 and which expires on
December 12, 2017. This patent covers the use of photochromically modified
spiropyrans in three dimensional, stable, optical memory storage devices.
o U.S. Patent No. 5,945,252, entitled "Photochemical Generation of Stable
Fluorescent Amines from Peri-Phenoxiderivatives of Polycyclic P-Quinones,"
which issued August 31, 1999 and which expires on December 11, 2017. This
patent covers the use of photochromically modified polycyclic quinones in
three dimensional, stable, optical memory storage devices.
o U.S. Patent No. 5,982,740, entitled "Dry Bonded Digital Versatile Disc,"
which issued on November 9, 1999 and which expires on November 25, 2017.
This patent covers a disc for storing digital information comprising a
plurality of adhesively bonded sub discs.
o U.S. Patent No. 6,009,065, entitled "Optical Pickup for 3-D Data Storage
Reading from the Multilayer Fluorescent Optical Disk," which issued on
December 28, 1999 and which expires on December 4, 2017. This patent
covers an optical pickup capable of reading binary optical information
from a multilayer fluorescent disk.
o U.S. Patent No. 6,027,855, entitled "Photo-Chemical Generation of Stable
Fluorescent Derivatives of Rhodamine B," which issued on February 22, 2000
and which expires on December 12, 2016. This patent covers a method for
optically recording information in a three-dimensional memory system
having an active medium which includes a Rhodamine B compound.
o U.S. Patent No. 6,039,898, entitled "Optical Memory Device and Method for
Manufacturing Thereof," which issued on March 21, 2000 and which expires
on October 22, 2017. This patent covers a o method of making an optical
memory device comprising one or more layers, each having a patterned
surface with spaced regions for receiving o fluorescent material capable
of recording and transmitting data.
o U.S. Patent No. 6,071,671 entitled "Fluorescent Optical Memory," which
issued on June 6, 2000 and which expires on October 6, 2017. This patent
covers a method for making an optical 3-D memory device having a plurality
of layers, each carrying fluorescent material which can be reversibly
rendered non-fluorescent by electromagnetic radiation for storing and
recovering data.
o U.S. Patent No. 6,080,288, entitled "System for Forming Nickel Stampers
Utilized in Optical Disc Production," which issued on June 27, 2000 and
which expires on May 29, 2018. This patent covers a system for electro
depositing a metal layer on a substrate using a rotary jet planarizer.
As of October 4, 2000, we own more than 70 additional pending U.S.
regular, U.S. provisional, Patent Cooperation Treaty and foreign patent
applications covering compositions, methods, and apparatus which relate to our
Fluorescent Media Technology. We are in the process of preparing and filing
other patent applications.
We cannot assure you that any of our patent applications will result in
the issuance of patents, or, if the applicable regulatory agency issues
patents, that they will be of sufficient scope and strength to provide
meaningful protection of our technology or any commercial advantage to us, or
that no one will challenge, invalidate or circumvent our patents in the future.
Moreover, we cannot assure you that our competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, do not presently have or will not seek patents that will prevent,
limit or interfere with our ability to make, use or sell our products either in
the U.S. or in other countries.
We intend to rely on a combination of patents, trade secrets, copyrights
and trademarks to protect our intellectual property rights. We cannot assure
you, however, that competitors will not independently develop substantially
equivalent proprietary technology, or that we can meaningfully protect our
rights in unpatented proprietary technology. Nevertheless, we intend to enforce
our intellectual property rights whenever we become aware of any infringement
or violation of our rights.
Our success and ability to compete will depend in part upon our ability to
protect our proprietary technology and other intellectual property. We have
filed numerous patent applications to protect technology, inventions and
improvements which we believe are significant to the development of our
business and
16
<PAGE>
protectable under applicable patent laws. However, we may sell our patented
products in foreign countries where we do not apply for patent protection, or,
if we do apply, where the applicable regulatory body does not grant a patent.
In those countries where we do not obtain patents, there is a risk that
competitors may be able to reverse engineer our products and undermine our
ability to compete there. In addition, there are foreign countries whose
intellectual property laws are not enforceable or, if enforceable, are
enforceable to a lesser extent than the intellectual property laws of the
United States. If we market our patented products in such countries, there is a
risk of piracy or reverse engineering by competitors that may undermine our
ability to compete.
We do not believe that we infringe any patents or infringe, dilute or
otherwise violate intellectual property of others. However, we cannot assure
you that current and potential competitors and other third parties have not
filed or will not file applications for patents, or that the applicable
regulatory body has not issued or will not issue, patents or other proprietary
rights relating to devices, apparatus, materials or processes which we use or
propose to use.
Competitive Conditions and Methods of Competition
Our Fluorescent Media Disc and Card Technology will compete with a variety
of existing and future data storage technologies. While hard disk drives are
the most common form of mass data storage and CDs and DVDs are the most common
removable data storage carriers, these are not the only storage media available
to consumers. A variety of options exist, each with unique price and
performance characteristics to meet specific requirements.
Existing Competitive Technologies
o Removable Mass Storage Devices
We believe that the trend of processing sensitive data on desktop PCs
instead of on mainframe computers has made removable mass storage solutions
increasingly important and that floppy diskettes, which have been the most
commonly used removable storage devices, often are insufficient for certain
data-intensive applications. For these applications, high capacity removable
mass storage devices offer advantages. Removable mass storage devices, which
are particularly suitable for secondary storage applications like data backup
and archiving, rather than as a primary form of on-line storage, come in many
forms, such as tape cartridges, Compact Disc Read Only Memory (CD-ROMs) and
recordable CDs (CD-R).
o Tape Drives
The magnetic tape drive, including floppy discs, was one of the first
computer storage technologies, and early mainframe computers commonly used it.
However, its inability to randomly access or write data like disk drives makes
it much slower than newer data storage technologies. Therefore, new
technologies have replaced it as the primary storage device in most computer
applications. However, due to its high storage capabilities and low
cost-to-megabyte ratio, it is still very much in use as a storage medium for
archiving large amounts of data. Additionally, recent advances in tape
technology, such as digital audio tape cartridges, have also made tape a
preferred technology for backing up network servers and other critical data.
o Optical Disc Drives
Optical Disc Drives, which include CD drives, DVD drives, and
magneto-optical drives, came onto the public scene in the mid 1980s and have
gained mainstream acceptance.
We anticipate that the advent of re-writable optical discs will make the
optical disc drive an increasingly important segment of the data storage
industry. In ODDs, such as CDs, DVDs, and MOs, light from a semiconductor laser
focuses onto the storage layer to perform writing or reading. The disc
substrate or a thick overcoat protects the storage layer, making this
technology well-suited for removable media.
17
<PAGE>
CD-ROM drives are by far the most widely used ODDs and are the computer
industry's standard for distribution of software products. They are typically
used to distribute large databases and documents that require only periodic
access. Read/Write drives, on the other hand, are used almost exclusively for
archival storage where it is important that the data cannot be changed or
erased after being written, as in the case of financial record storage.
CD Audio is the primary means of music distribution world-wide, and DVD
video is fast becoming the leading distribution method for film and video
content.
o Magnetic Disk Drives
One of the original data storage media, some view magnetic disk drives
(commonly known as hard drive/disc) as the most reliable source of storage
media. Despite the advent of alternate technologies, magnetic storage remains
dominant, particularly where mass storage is concerned. Magnetic disk heads fly
on a slider approximately one ten-millionth of a meter over the surface of the
storage medium. The writing process creates small magnetic domains, and the
read process detects the magnetic fields of these domains. One can overwrite
the information indefinitely.
o Magneto-Optical Disks
Magneto-optical, or MO, disk systems combine the technology of traditional
magnetic media, like hard disk drives, with optical disc technology. Some
expect that MO technology will allow users to store hundreds of megabytes of
data on a disk that looks similar to a traditional 3.5-inch floppy disk and
typically comes in a 3.5-inch or 5.25-inch form factor. MO disks have many
advantages. They provide relatively high data densities. One can change the
data stored on them at will, and such data are resistant to magnetic fields,
unlike a traditional floppy or hard disk. The disadvantage of MO technology is
that, because of the relatively high intensity of the magnetic field created
with the combined use of the read/write head and laser, the two rotations
required for writing data make them twice as slow as hard disk drives during
write operations. We believe that our Fluorescent Memory Technology, due to its
faster read/write capability coupled with high data storage capacity, has a
distinct advantage in this product category.
o Personal Computer Cards
PC Cards use the Personal Computer Memory Card International Association
standard, and can be either storage or Input/Output cards. By virtue of being
compact, highly reliable, lightweight and requiring low power, they are storage
media for battery-powered notebook and palmtop computers, hand-held personal
digital assistants and personal communicator devices. Due to their diminutive
size, these "memory cards" make transporting data relatively easy. One can use
them for program storage or data interchange between systems. A significant
deterrent to the widespread use of PC cards is their high cost relative to hard
disk drives. We believe that manufacturers can produce our 1 to 5 GB
ClearCardsTM at a lower cost than PC Cards of equivalent performance levels
enabling our joint ventures and licensees to sell those ClearCards at prices
below those comparable PC Cards.
o Flash Memory
Flash memory, a rewritable memory based on semi-conductors, is currently a
$15 billion a year market according to recent market analysis. The maximum
storage per unit is not more than 512 MB. While flash memory represents an
extremely large market, its value per byte is relatively quite low. We think
that our storage products offer much more compelling value per byte.
Competitive Technologies in Development
In addition to the existing storage devices, there are some comparable
data storage technologies in the research and development phase, some of which
might never be commercially used.
18
<PAGE>
o Blue Laser Optical Disc Technology
Efforts by Royal Phillips Electronics and Sony Corporation to produce
higher storage capacities based on reflective technologies have centered around
the introduction of blue lasers. However, we believe that blue lasers are not
likely to be available to consumers for several years. In addition, we project
that FMD Technology will be able to take advantage of the blue laser technology
on multiple layers rather than a single layer in case of DVD.
o Future Magnetic Hard Disk Drives
The achievable area density of magnetic recording has grown about 60% per
year during the last decade. Devices with an area density of 4 GB per square
inch are in production, and area densities of 20 GB per square inch have been
created. However, the magnetic domains become unstable at a physical and
technical limit called the super-paramagnetic limit. Therefore, further growth
in area density is limited, although it is not certain where this limit puts an
end to the further density increase of magnetic memory. Furthermore, many
magnetic memory carriers are not easily removable, are not easily disposable
and are relatively expensive.
o Holographic Storage
The introduction of commercial lasers sparked interest in enabling 3
dimensional storage using holographic technology. However, attempts at
commercialization so far failed primarily due to lack of a suitable storage
materials for media manufacturing.
o Near Field Drives
In near field recording, a device focuses onto the front surface of the
storage medium, thereby avoiding some problems with distortions of the focused
beam in the protected layer. Near field drives can achieve high density, but at
high cost, as the medium remains exposed to dust and remains vulnerable to
crashes of the drive head. Thus, we believe that this technology is not
suitable for portable devices. The storage capacity is limited, because in near
field optics, data is stored in a thin layer at the surface.
o Atomic Force Microscopy
In the field of probe-based storage, scientists are fabricating tiny
silicon cantilevers one one-hundred thousandth of a meter long and three ten
millionths of a meter thick, with an even smaller silicon probe tip that is
eight billionths of a meter in diameter. The tip rests on a rotating plastic
disk. To store data, heat from an electric pulse through the tip momentarily
softens the surface of the plastic, and the slight force that the tip exerts on
the plastic pokes a tiny depression. As the tip is pulled across the tip on
playback, there is detection of its dip into the pit. Researchers report that
this technique can reliably read and write data at a density of 64 gigabits per
square inch and have developed the basics for a read only system holding a CD's
worth of data on a disk the size of a penny.
o Scanning Tunneling Microscopy
Scanning Tunneling Microscopy reportedly has the potential to store as
many as one million GB per square inch, although we do not expect consumers to
see commercial usage of this technique in the foreseeable future. The technique
involves moving xenon on a nickel surface with a scanning tunneling microscope.
As attempted, this process required a temperature, in Fahrenheit, of nearly 460
degrees below zero and several hours to complete.
Key Trends and Major Competitors in the Market
The exponential growth of devices using data storage technology -- for
consumer, business, and entertainment applications -- and their associated
storage requirements represent a prime opportunity for our FMD/C Technology.
The following is a sample of the trends and rapid growth of the data storage
industry as it has impact on more and more aspects of daily life.
19
<PAGE>
o In the PC market, memory-hungry consumer applications ranging from
computer games to database applications require consumers to upgrade
frequently. Eight years ago, many considered an 80 MB hard drive to be
excessive -- today a hard drive of that size could not accommodate
mainstream operating systems such as MS Windows.
o The storage requirements of enterprise computing applications such as
data warehousing solutions doubles almost annually.
o Hand-held devices, including PDAs and mobile phones, are expected to
demand multi-gigabyte capacities in the next few years in order to store
rich multimedia content.
o The entertainment industry, as it moves to higher resolution standards in
applications such as Digital Cinema and HDTV, will require minimum data
storage capacities of up to 100 GB per movie -- we believe that we are the
only company that has the capacity in the near future to provide a single
disc solution for these entertainment applications.
The standard removable memory media in production today is the reflective
optical disc. Companies involved in the production of Compact Disk Read Only
Memory (CD ROM), recordable CDs (CD-R), CD-RW, DVD-ROM and DVD-R discs include
Royal Phillips Electronics, Sony Corporation and Discovision Associates for CD
and several industry consortiums for DVD (Royal Phillips Electronics, Sony
Corporation, Pioneer Corporation, Hitachi, Ltd., Matsushita Electronics Co.,
Ltd., Mitsubishi Electric, Time Warner Inc., Toshiba Corporation, and Thomson
Corporation). These firms license the basic technology behind the format and
the production of discs and earn approximately $0.15 per disc manufactured and
approximately 3% of the sale price for each drive.
Over 500 firms worldwide manufacture optical discs with the majority of
discs being produced by larger firms that also own the disc's content,
including Time Warner Inc., Sony Corporation, BMG Entertainment. Large
independent replicators of pre-recorded content include Panasonic, Technicolor,
Cinram International, Inc., Disctronics Manufacturing, Inc., and in the
recordable market (CD-R, CD, RW) Ritek Corporation and CMC Magnetics.
Drive/Player manufactures include, among others, Denon Digital, LLC,
Hitachi, LTD., Victor Company of Japan, LTD., Kenwood Corporation, Panasonic,
Royal Phillips Electronics, Pioneer Corp., Sharp Electronics Corp., Sony
Corporation, Thomson Corporation and Toshiba Corporation.
Content owners include software producers, music labels and movie studios.
All major studios are now supporting the open DVD-Video format with over 4,200
titles available in North America.
Methods of Competition and Certain Challenges
Given the licensing and joint venture development aspects of our business
model, we have established corporate goals and strategies that will guide the
process. These goals include:
o the identification of key strategic market segments,
o the creation of marketable products demanded by these segments,
o the development of business relationships with best-in-class partners in
these segments,
o the establishment of FMD/C as an industry standard for the next
generation of removable optical data storage, and
o the creation of strong brand awareness and recognition of our
technology.
We are intent on bringing our products to market as quickly as possible,
and we will focus on markets where we can expect to gain a significant market
share and thereby achieve the maximum return for each marketing dollar spent,
both financially and strategically. We intend to leverage our experience within
these segments to cross over from specific niche markets into broader
mainstream markets.
20
<PAGE>
The exploitation of key market segments will coincide with development
milestones relating to FMD/C technology. We will focus first on creating
relationships regarding ROM products, followed by WORM and then R/W and hybrid
ROM-R-R/W products. Exceptions to this strategy may occur, such as the possible
determination during the ROM phase of certain key strategic relationships
regarding WORM and R/W drives and media.
Potential roadblocks to the introduction of FMD/C technology include:
o the willingness of content and application providers to accept the new
media standards and to release valuable content for the media,
o acceptance, by media and drive manufacturers, of the royalty pricing
scheme, and
o creation of a critical mass of initial partners able to ensure broad
acceptance and adoption of the technology and its associated standards.
21
<PAGE>
Selected Consolidated Financial Data
The following selected consolidated financial information with respect to
our financial position as of December 31, 1999, 1998 and results of operations
for the years ended December 31, 1999 and 1998 and the period from September
25, 1997 (inception) to December 31, 1997 has been derived from our audited
consolidated financial statements. The selected consolidated financial
information with respect to our financial position as of September 30, 2000 and
1999 and December 31, 1997, and our results of operations for the nine months
ended September 30, 2000 and 1999 have been derived from our unaudited
consolidated financial statements which, in the opinion of our management, have
been prepared on the same basis as the audited financial statements and include
all normal and recurring adjustments necessary for a fair presentation of the
information set forth therein. The results for the nine months ended September
30, 2000 are not necessarily indicative of future results. You should read the
selected consolidated financial information presented below in conjunction with
our consolidated financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in this
prospectus.
For our fiscal year ended 1997, our financial statements use September 25
as the inception date. Thus, the financial information for our fiscal year 1997
is for approximately three months, whereas our financial information for fiscal
year 1998 is for a twelve-month period.
<TABLE>
<CAPTION>
Cumulative
Amounts From
Inception
(September 25,
1997) Through Nine Months
September 30, Ended September 30,
---------------- ----------------------------------
(Unaudited) (Unaudited)
2000 2000 1999
---------------- ----------------- ---------------
<S> <C> <C> <C>
Statement of Operations
Data
Operating expenses:
Research and development ........... $ 8,707,016 $ 3,267,122 $ 1,717,983
General and administrative ......... 7,841,960 3,030,269 906,140
Marketing(1) ....................... 4,631,294 4,631,294 --
------------- ------------- -------------
Total operating expenses ........... 21,180,270 10,928,685 2,624,123
Other expense:
Interest (income) expense,
net ............................... 4,612,161 4,259,462 126,591
Taxes .............................. 142,862 75,812 12,000
------------- ------------- -------------
Net loss ........................... $ (25,935,293) $ (15,263,959) (2,762,714)
Net loss per share--basic
and diluted ....................... (0.37) (0.09)
Weighted average number of
common shares
outstanding--basic and
diluted ........................... 41,234,050 29,238,000
</TABLE>
<PAGE>
[RESTUB TABLE]
<TABLE>
<CAPTION>
Period From
Inception
(September 25,
Years Ended 1997) Through
December 31, December 31,
------------------------------ ---------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Statement of Operations
Data
Operating expenses:
Research and development ........... $ 2,413,239 $ 1,534,948 $ 1,491,707
General and administrative ......... 2,084,027 1,660,477 1,067,187
Marketing(1) ....................... -- -- --
------------ ------------ ------------
Total operating expenses ........... 4,497,266 3,195,425 2,558,894
Other expense:
Interest (income) expense,
net ............................... 305,833 (6,985) 53,851
Taxes .............................. 63,588 3,462 --
------------ ------------ ------------
Net loss ........................... (4,866,687) (3,191,902) (2,612,745)
Net loss per share--basic
and diluted ....................... (0.15) (6.80) (4,355)
Weighted average number of
common shares
outstanding--basic and
diluted ........................... 32,148,978 469,275 600
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, December 31,
-------------------------------- ---------------------------- ---------------
2000 1999 1999 1998 1997
--------------- --------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current Assets ........................... $ 12,099,753 $ 529,147 $ 2,181,128 $ 294,358 $ 2,854,766
Current liabilities ...................... 2,464,662 4,447,223 3,596,404 1,430,871 5,541,326
Total assets ............................. 12,473,064 824,052 2,422,228 561,589 2,954,929
Long-term liabilities .................... 2,916,180 55,650 2,145,449 46,825 26,345
Additional paid in capital ............... 2,992,456 4,870,021 7,310,708 4,859,326 --
Total stockholders' equity (deficit) ..... 7,050,071 (3,678,821) (3,319,625) (916,107) (2,612,745)
</TABLE>
------------
(1) Includes a non-cash compensation charge to operations of $4,293,000,
representing the fair value of options granted to a non-employee
consultant who provided business development services.
22
<PAGE>
Selected Quarterly Financial Data
The following table presents unaudited interim operating results of the
Company. The Company believes that the following information includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation, in accordance with generally
accepted accounting principals. The operating results for any interim period
are not necessarily indicative of results for any
other period.
<TABLE>
<CAPTION>
1999 Quarters
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development ............... 323,206 739,099 655,678 695,256
General and administrative ............. 294,259 260,604 351,277 1,177,887
------- ---------- ----------- ---------
Total operating expenses ............... 617,465 999,703 1,006,955 1,873,143
======= ========== =========== =========
Interest (income) expense, net ......... 24,454 4,836 97,301 179,242
Net loss ............................... (648,919) (1,008,539) (1,105,256) (2,103,973)
2000 Quarters
--------------------------------------------------
March 31 June 30 September 30
--------------- --------------- --------------
Operating expenses:
Research and development ............... 779,733 1,138,305 1,349,084
General and administrative ............. 1,121,072 859,223 1,049,974
Marketing(1) ........................... 145,965 4,372,881 112,448
-------------- -------------- --------------
Total operating expenses ............... 2,046,770 6,370,409 2,511,506
============== ============== ==============
Interest (income) expense, net ......... 761,682 828,579 2,669,202
Net loss ............................... (2,816,973) (7,201,987) (5,244,999)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in these forward-looking statements as a result of various
factors, including risk factors set forth in this Report. The following
discussion should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Report.
Overview
Constellation 3D, Inc. ("C3D"), formerly known as C3D Inc., is an
international enterprise headquartered in New York, New York. With operations
in the United States, Israel and Russia, and a subcontractor who performs
services for the Company in the Ukraine, the Company researches and develops
its proprietary technology ("Fluorescent Memory" or "Fluorescent Memory
Technology")
The Company plans to continue its focus on research and development of its
data storage technology and to develop strategic alliances, joint ventures and
licensing arrangements with established companies in the data storage industry.
The Company expects that its operating expenses will increase significantly
during the foreseeable future as the result of its plans to:
o increase expenditures on marketing and business development by hosting
demonstrations of the Company's technology to potential strategic
partners, continually obtaining information about the market size and
growth parameters to update the market analysis, updating industry
pricing and cost trends, enlarging the team responsible for establishing
partnerships, and monitoring new technological developments in the
industry. The Company expects to increase expenditures from the current
levels of approximately $40,000 per month to $150,000 per month for the
above activities;
o enhance existing capabilities of products by increasing the levels of
research and development expenditures and capital assets from the current
levels of $360,000 per month to $450,000;
o increase expenditures on administration to provide the overall management
of the parent company as well as the subsidiaries from the current levels
of $340,000 per month to $380,000 per month;
o increase monthly expenditures on professional fees for patent
registration, licensing and joint venture agreements from $40,000 per
month to $100,000 per month; and
o establish research and development facilities with initial manufacturing
capabilities in the United States by hiring additional staff and
transferring equipment and personnel. The Company expects such expenses
to be approximately $1,000,000 over the next twelve months.
The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures. The Company has sufficient
working capital to support its operations through September 2001 and is in the
process of negotiating for additional capital. The Company does not expect to
receive revenues until the end of the second quarter of the fiscal year 2001
and expects to continue to incur operating losses until late in the third or
fourth quarter of fiscal year 2002. The Company is currently exploring
additional financing alternatives, including the possibility of private equity
or debt offerings.
Although our existing debt securities contain no such restrictions, the
signing of future convertible debt or preferred share agreements could result
in restrictions being placed on dividends, interest and principal payments, or
any other covenant restrictions that could make payments of such debts
difficult, create difficulties in obtaining further financings, limit the
flexibility of changes in the business, and cause substantial liquidity
problems. There can be no assurance, however, that such financing will be
available or, if it is, that it will be available on terms acceptable to the
Company.
On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company. C3D then issued 10,500,000 shares of Common Stock to
Constellation 3D Trust LLC as a capital contribution and later cancelled all
but 500,000 of said shares. Constellation 3D Trust LLC intends to use the
shares to raise debt or equity capital and contribute the proceeds thereof to
C3D, which proceeds shall be used for general corporate purposes. There is no
assurance that the issuance of the shares will result in the raising of
24
<PAGE>
any debt or equity capital. For the purposes of the Company's consolidated
condensed financial statements, the net issuance of the 500,000 shares of
Common Stock are not considered to be issued or outstanding because the Common
Stock has remained under the control of C3D and will be cancelled if no
financing transaction is completed.
On August 22, 2000, the Company issued 10,000 warrants jointly to Reflekt
Technology, Inc., a Massachusetts corporation ("Reflekt") and Vladimir
Schwartz, President, sole director and sole shareholder of Reflekt ("Schwartz")
in exchange for certain patents, which Reflekt or Schwartz owned in whole or in
part. The warrants are exercisable beginning August 22, 2001 at an exercise
price of $11.25 per share and terminate on August 22, 2004.
On December 1, 1999, the Company entered into a Placement Agency Agreement
and Warrant Agreement dated December 1, 1999 (the "Agency Agreement" and
"Warrant Agreement" respectively) with Sands Brothers & Co., Ltd. ("Sands
Brothers") which obligates Sands Brothers to raise through the placement of the
Company's securities, on a best efforts basis, a minimum of $4.0 million (the
"Minimum Amount") and, as amended on March 23, 2000, a maximum of $120.0
million for the Company. By the face of the March 23, 2000 amendments to the
Agency and Warrant Agreements, the Company was to issue to Sands Brothers
warrants to purchase 1,050,000 shares at an exercise price of $3.67 per share
for the Minimum Amount of securities sold, and 600,000 stock warrants for each
$1.0 million of the Company's securities sold up to $25.0 million (the
"Additional Placement Agent Warrants") at an exercise price equal to a 40%
discount to the average of the bid price of the Company's common stock for the
120 day period prior to any closing, but in no event less than $5.00 per share.
On March 24, 2000, Sands Brothers Venture Capital Associates LLC, an affiliate
of Sands Brothers, invested $4 million in the Company through a subordinated
convertible debenture. Pursuant to the provisions in the Agency Agreement, the
Company agreed to issue to Sands Brothers warrants to purchase 1,050,000 and
2,400,000 shares of common stock at the prices of $3.67 and $15.13,
respectively.
On March 23, May 16, May 31, June 28, and August 3, 2000, the Company
amended the Placement Agency Agreement, Warrant Agreement and Warrant
Certificate No. SB-2. Among other results of the amendments, Sands Brothers is
no longer the Company's exclusive financing source and is not entitled to any
fees or stock warrants with respect to financing sources, which it does not
bring to the Company.
The Company believes that the Warrants and all provisions in the Agency
Agreement, and all documents related thereto which call for the issuance of the
warrants to Sands Brothers are no longer enforceable, because Sands Brothers
failed to satisfy its obligation to raise $7.5 million in financing for the
Company within 150 days of the Commencement Date as defined in the Agency
Agreement. The Company intends to renegotiate the foregoing documents with
Sands Brothers.
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as the data storage market.
These risks include, but are not limited to, rapid technological change,
inability to manage growth, competition from more established companies,
dependence on suppliers, internal system problems and the inability to obtain
sufficient financing and an unproven business record.
Results of Operations for the Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
The Company's reported financial condition and earnings for the nine
months ended September 30, 2000, includes all amounts for the parent company,
C3D, and C3D's three wholly owned operating subsidiary companies, C-TriD Israel
Ltd., an Israeli company ("C-TriD"), TriD Store Vostok, a Russian company
("Vostok"), and FMD&E, Inc., a Massachusetts company ("FMD&E"). The Company's
reported financial condition and results of operations for the comparative nine
months ended September 30, 1999, include the consolidated amounts of the
predecessor company, Constellation Tech.
25
<PAGE>
Revenue. The Company generated no revenue for the nine months ended
September 30, 2000 and 1999.
Research and Development Expenses. The Company incurred research and
development expenses of $3,267,122 for the nine months ended September 30,
2000, compared with $1,717,983 for nine months ended September 30, 1999 for an
increase of $1,549,139, or about 91%. Research and development expenses consist
primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors,
materials consumed in the development process, and professional fees for patent
registration of intellectual property. The significant costs were payroll for
staff and contractors, which amounted to $2,109,885 for the nine months ended
September 30, 2000, compared with $1,005,242 for the nine months ended
September 30, 1999. The increase was primarily due to the hiring of additional
staff with greater qualifications, and the expansion of the Company's
contractual relationships with current subcontractors. Professional fees were
$288,677 for patent registration for the nine months ended September 30, 2000,
compared with $451,557 for the nine months ended September 30, 1999. The
decrease in patent registration was due to the Company's proprietary
Fluorescent Memory Technology becoming more proven and patentable during the
same period last year. Materials consumed amounted to $275,972 for the nine
months ended September 30, 2000, compared with $36,455 for the nine months
ended September 30, 1999. The increase in material was due to purchase of
various lasers required at the current stage of development of the Company's
products. Travel expenses amounted to $221,775 for the nine months ended
September 30, 2000, compared with $13,383 travel expenses for the nine months
ended September 30, 1999. The increase in travel costs is due to the travel of
research and development staff between the Company's geographical locations.
General and administrative costs associated with research and development
facilities were $225,200 for the nine months ended September 30, 2000, compared
with $196,793 for the nine months ended September 30, 1999.
General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional fees, telephone, travel
and other general corporate expenses. General and administrative expenses were
$3,030,269 for the nine months ended September 30, 2000, compared with $906,140
for the nine months ended September 30, 1999 for an increase of $2,124,129, or
about 234%. The Company paid substantially more for management and facilities
for the nine months ended September 30, 2000, than it did for the nine months
ended September 30, 1999. Payroll expenses and management fees relating to
general and administrative activities were $639,201 for the nine months ended
September 30, 2000, compared with $241,963 for the nine months ended September
30, 1999. The rise in compensation expenses was due to the increase in the size
and compensation of the management team compared to the nine months ended
September 30, 1999. Professional fees were $1,049,968 for the nine months ended
September 30, 2000, compared with $55,557 for the nine months ended September
30, 1999. The increase was for legal support for the Company's legal and
accounting work required for the preparation of the publicly filed quarterly
and annual reports, and the recently filed registration statement. Office and
maintenance charges were $620,018 for the nine months ended September 30, 2000,
compared with $351,536 for the nine months ended September 30 1999. The
increase in office and maintenance charges relates to the increased activity of
the New York office for the nine months ended September 30, 2000, compared to
the nine months ended September 30, 1999, when there was no corporate office in
New York. Travel and accommodation expenses were $412,906 in the nine months
ended September 30, 2000, compared with $100,985 for the nine months ended
September 30, 1999. The increase in travel and accommodation expenditures was
due to the increased fund-raising activities of the Company for the nine months
ended September 30, 2000, over the nine months ended September 30, 1999.
Consulting fees amounted to $139,516 for the nine months ended September 30,
2000, compared with $92,185 for the nine months ended September 30, 1999.
Shareholder relations expenses and filing fees were $139,708 for the nine
months ended September 30, 2000, compared with no expenses or fees for the nine
months ended September 30, 1999.
Marketing. Marketing expenses consisted of compensation to employees and
consultants and travel expenditures for demonstrations of the Company's
technology to potential strategic partners. Marketing expenses were $4,631,294
for the nine months ended September 30, 2000, compared to no expenses for the
nine months ended September 30, 1999, when the Company had yet to demonstrate
its technology. Most of these expenses, $4,519,161, were compensation expenses
relating to marketing and business development. The
26
<PAGE>
compensation expense consisted of $4,293,000 in non-cash stock-based
compensation due to the grant of 450,000 options to a non-employee consultant
and $226,161 in payroll and consulting fees for the nine months ended September
30, 2000, compared with no such expenses for the nine months ended September
30, 1999. The compensation charge relating to the grant of stock options
represents the relative fair value ascribed to the options measured using the
Black-Scholes option-pricing model. The Company reflected the effects of the
compensation expense related to the grant of stock options as an increase to
additional paid-in capital in the statement of stockholders' equity. Travel and
accommodation expenses for product demonstrations and exhibits were $107,430
for the nine months ended September 30, 2000, compared with no expenses for the
nine months ended September 30, 1999. The Company incurred $4,703 in expenses
relating to media exposure for the nine months ended September 30, 2000,
compared to no expenses for the nine months ended September 30, 1999.
Interest expense, net. The Company recorded net interest expense of
$4,259,462 for the nine months ended September 30, 2000, compared with $126,591
for the nine months ended September 30, 1999 for an increase of $4,132,871, or
3253%. The interest expense included $1,354,700 for the amortization of the
financing cost associated with the detachable warrants issued in connection
with the issuance of subordinated convertible debt and the convertible line of
credit during the nine months ended September 30, 2000, compared to no such
expense for the nine months ended September 30, 1999. The Company recorded
interest expense of $193,000 for the beneficial conversion feature on
subordinated convertible debt issued during the nine months ended September 30,
2000, compared to no such expense for the nine months ended September 30, 1999.
During the nine months ended September 30, 2000, a shareholder loan and a
convertible note were converted into common stock. The original conversion
terms were amended to reduce the conversion price and the Company issued
warrants relating to the shareholder loan and convertible note. The value
ascribed to the warrants and the modification of the conversion terms for
accounting purposes was $1,730,000; such amount was recorded as interest
expense and as an addition to paid-in capital of stockholders' equity. The
Company also recorded an interest expense of $500,000 related to the commission
charged on the subordinated convertible debt issued during the nine months
ended September 30, 2000, compared with no such expense for the nine months
ended September 30, 1999. Interest expenses relating to bank overdrafts,
shareholder loans and subordinated convertible debt amounted to $501,898 for
the nine months ended September 30, 2000, compared to $126,591 for the nine
months ended September 30, 1999. Interest revenue was generated through
short-term deposits and amounted to $20,136 during the nine months ended
September 30, 2000, compared with no interest revenue for the nine months ended
September 30, 1999.
Taxes. The Company has generated inter-company taxable income to date and
therefore has incurred $75,812 for the nine months ended September 30, 2000,
compared with $12,000 for the nine months ended September 30, 1999. Israeli and
Russian subsidiaries, C-TriD and Vostok, incurred taxes due to their treatment
of inter-company advances as taxable revenue. The Company has not generated any
taxable income to date and therefore has not paid any federal income taxes
since inception. The Company has fully reserved deferred tax assets created
primarily from net operating loss carry-forwards because management is unable
to conclude that future realization is likely.
Results of Operations for the Three Months Ended September 30, 2000 Compared to
the Three Months Ended September 30, 1999
The reported financial condition and earnings for the three months ended
September 30, 2000, includes all amounts for the parent company, C3D, and C3D's
three wholly owned operating subsidiary companies, C-TriD, Vostok and FMD&E.
The reported financial condition and results of operations for the comparative
three months ended September 30, 1999, include the consolidated amounts of the
predecessor company, Constellation Tech.
Revenue. The Company generated no revenue in the three months ended
September 30, 2000 and 1999.
Research and Development Expenses. Research and development expenses
consist primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors,
professional fees for intellectual property, general and administrative
expenses related to
27
<PAGE>
development offices, and travel expenses. The Company incurred research and
development expenses of $1,349,084 for the three months ended September 30,
2000, compared with $655,678 for the three months ended September 30, 1999 for
an increase of $693,406, or about 106%. The significant costs were payroll for
staff and contractors, which amounted to $963,325 for the three months ended
September 30, 2000, compared with $485,242 for the three months ended September
30, 1999. Professional fees were $139,400 for patent preparation and filing for
the three months ended September 30, 2000, compared with $68,305 for the three
months ended September 30, 1999. General office expenses relating to research
and development amounted to $65,005 for the three months ended September 30,
2000, compared with $79,657 for the three months ended September 30, 1999. The
Company incurred $93,191 for expenses relating to the acquisition of materials
for the three months ended September 30, 2000, compared with $18,574 for the
three months ended September 30, 1999. The increase in material was due to
purchase of lasers required at the current stage of development of the
Company's products. Travel expenses amounted to $80,685 for the three months
ended September 30, 2000, compared with $13,383 for the three months ended
September 30, 1999. The increase in travel costs is due to the travel of
research and development staff between the Company's geographical locations.
General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional services, telephone
expense, travel and other general corporate expenses. General and
administrative expenses were $1,049,974 for the three months ended September
30, 2000, compared with $351,277 for the three months ended September 30, 1999
for an increase of $698,697, or about 199%. This increase reflected the hiring
of additional management, increased facilities charges and expansion of
operations in the United States. Payroll expenses and management fees relating
to general and administrative expenses were $215,443 for the three months ended
September 30, 2000, compared with $71,628 for the three months ended September
30, 1999. The increase was due to the management team receiving compensation
directly from C3D during the third quarter of last year rather than the
predecessor company. Office and maintenance charges consisting of expenditures
on rent, general maintenance and communications were $332,013 for the three
months ended September 30, 2000, compared with $145,574 for the three months
ended September 30, 1999. Travel and accommodation expenses were $160,062 for
the three months ended September 30, 2000, compared with $8,208 for the three
months ended September 30, 1999. Professional fees were $309,273 for the three
months ended September 30, 2000, compared with $29,165 for the three months
ended September 30, 1999, the majority of which were related to legal support
for the preparation of the previously filed quarterly and registration
statements. Consulting fees amounted to $9,000 for the three months ended
September 30, 2000, compared with $42,745 for the three months ended September
30, 1999. Shareholder relations expenses and filing fees were $51,955 for the
three months ended September 30, 2000, compared with no expenses or fees for
the three months ended September 30, 1999.
Marketing. Marketing expenses consisted of compensation to employees and
consultants and travel expenditures for demonstrations of the Company's
technology to potential strategic partners. Marketing expenses were $112,448
for the three months ended September 30, 2000, compared to no expenses for the
three months ended September 30, 1999, when the company had yet to demonstrate
its technology. Payroll and consulting fees relating to marketing and business
development were $61,161 for the three months ended September 30, 2000,
compared with no expenses for three months ended September 30, 1999. Travel and
accommodation expenses were $51,287 for the three months ended September 30,
2000, compared with no expenses for the three months ended September 30, 1999.
Interest expense, net. The Company has recorded net interest expense of
$2,669,202 for the three months ended September 30, 2000, compared with $97,301
for the three months ended September 30, 1999 for an increase of $2,571,901, or
2643%. The Company recorded interest expense of $662,096 for the amortization
of the financing cost associated with the detachable warrants during the three
months ended September 30, 2000, compared to no expense for the three months
ended September 30, 1999. The Company recorded interest expense of $73,000 for
the beneficial conversion feature on convertible line of credit issued during
the three months ended September 30, 2000, compared to no such expense for the
three months ended September 30, 1999. During the three months ended September
30, 2000, a shareholder loan and a convertible note were converted into common
stock. The original conversion terms were amended to reduce the conversion
price and the Company issued warrants relating to the Shareholder loan and
convertible note. The value ascribed to the warrants and the modification of
the conversion terms for accounting purposes was
28
<PAGE>
$1,730,000; such amount was recorded as interest expense and as an addition to
paid-in capital of stockholders' equity. Interest expense relating to
shareholder loans, notes payable and the subordinated convertible debts
amounted to $205,013 for the three months ended September 30, 2000, compared to
$97,301 for the three months ended September 30, 1999. Interest revenue was
generated through short-term deposits and amounted to $907 during the three
months ended September 30, 2000, compared with no interest revenue for the
three months ended September 30, 1999.
Taxes. The Company has generated inter-company taxable income to date and
therefore has paid $64,291 for the three months ended September 30, 2000,
compared with $1,000 for the three months ended September 30, 1999. The taxes
were incurred in the Israeli and Russian subsidiaries, C-TriD and Vostok, due
to their treatment of inter-company advances as taxable revenue. The Company
has not generated any taxable income to date and therefore has not paid any
federal income taxes since its inception. Deferred tax assets created primarily
from net operating loss carry-forwards have been fully reserved as management
is unable to conclude that future realization is more likely than not.
Results of Operations for the Year Ended December 31, 1999 Compared to the Year
Ended December 31, 1998
Our reported results of operations from operations for fiscal 1999 include
the combined earnings of two subsidiaries, C-TriD and Vostok, for the full 1999
year, the earnings of the predecessor company, Constellation Tech, for the nine
months ended September 30, 1999, together with our earnings after October 1,
1999, the date on which we completed the acquisition of certain assets of
Constellation Tech.
Revenue. We generated no revenue in the years ended December 31, 1999 and
1998.
Research and Development Expenses. Research and development expenses
consist primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors,
materials consumed in the development process, and professional fees for
intellectual property. We incurred research and development expenses of
$2,413,239 for the year ended December 31, 1999, compared with $1,534,948 for
the year ended December 31, 1998, for an increase of $878,291 or 57%. The
significant costs were payroll for staff and contractors which amounted to
$1,366,002 for the year ended December 31,1999, compared with $965,114 for year
ended December 31, 1998. The increase in payroll expenditures was due to the
increase in staff to 54 people for the year ended December 31, 1999 from 35
people for the year ended December 31, 1998. Professional fees were $556,432
for patent preparation and filing for the year ended December 31, 1999,
compared with $312,612 for the year ended December 31, 1998. The increase in
patent costs was due to the expanded coverage in scope and geography of our
Fluorescent Memory Technology. Materials consumed amounted to $64,155 for the
year ended December 31, 1999, compared with $139,565 for the year ended
December 31, 1998. This decrease was due to the reduction of new materials
required as our products went from prototypes to a demonstrable product in
1999.
General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional services, telephone
expense, travel and other general corporate expenses. General and
administrative expenses were $ 2,084,027 for the year ended December 31, 1999
compared with $1,660,477 for the year ended December 31, 1998 for an increase
of $423,550 or about 26%. This increase reflected the hiring of additional
management personnel, increased facilities charges and expansion of operations.
Payroll expenses and management fees relating to general and administrative
expenses were $466,034 in the year ended December 31, 1999, compared with
$690,066 for the year ended December 31, 1998. The decrease was due to the
reduction of a management contract from $400,000 for the year ended December
31, 1998 to $100,000 for the year ended December 31, 1999. Office and
maintenance charges consisting of expenditures on rent, general maintenance,
and communications were $436,903 for the year ended December 31, 1999, compared
with $491,322 for the year ended December 31, 1998. Travel and accommodation
expenses were $303,443 for the year ended December 31, 1999, compared with
$327,355 for the year ended December 31, 1998. Professional fees were $328,480
for the year ended December 31, 1999, compared with $56,180 for the year ended
December 31, 1998, the majority of which relate to legal support for our
financing transactions and the preparation of our publicly filed registration
statement. Business development expenses were $97,635 for the year ended
December 31, 1999, compared with no business development expenses for the year
ended December 31, 1998.
29
<PAGE>
Interest Income and Expense, net. We have net interest expense of $305,833
for the year ended December 31, 1999, compared with a net interest income of
$6,985 for the year ended December 31, 1998. The interest expense included a
$125,000 beneficial conversion feature on subordinated convertible debt issued
during the year ended December 31, 1999, compared to no such expense for the
year ended December 31, 1998. We also recorded an interest expense of $100,000
related to the commission charged on the subordinated convertible debt issued
during year ended December 31, 1999, compared with no such expense for the year
ended December 31, 1998. Interest income and expense is generated by bank
overdrafts, shareholder loans, subordinated convertible debt and non-cash
financing charges.
Income Taxes. We have generated inter-company taxable income to date and
therefore have paid $63,588 for the year ended December 31, 1999, compared with
$3,462 for the year ended December 31, 1998. Israeli and Russian subsidiaries,
C-TriD and Vostok, incurred taxes due to their treatment of inter-company
advances as taxable revenue. We have not generated any taxable income to date
and therefore have not paid any federal income taxes since our inception. We
have fully reserved deferred tax assets created primarily from net operating
loss carry-forwards as management is unable to conclude that future realization
is more likely than not.
For our fiscal year ended 1997, our results of operations include the
period from September 25 (inception) to December 31, 1997. Thus, the results of
operations for our fiscal year 1997 is for approximately three months, whereas
our results of operations for fiscal year 1998 is for a twelve-month period.
Therefore, no comparison has been made between fiscal years 1997 and 1998.
Liquidity and Capital Resources
As of September 30, 2000, the Company's cash position was $11,916,493 and
its working capital was $9,635,091, compared to a cash position of $2,030,139
and a working capital deficit of $1,415,276 as at December 31, 1999.
Since inception, the Company has financed its operations from capital
contributions, shareholder loans, subordinated convertible debt, and borrowings
from a line of credit. During the nine months ended September 30, 2000, the
Company received net proceeds of $11,544,517 from the sale of common stock,
proceeds of $4,000,000 from the issuance of subordinate convertible debt,
$1,000,000 from borrowings on the line of credit, and advances from related
parties of $207,790. This compares with net proceeds from shareholder loans and
advances from related parties of $2,478,945 for the nine months ended September
30, 1999. During the nine months ended September 30, 2000, convertible notes in
the aggregate amount of $2,367,973 and loans payable in the aggregate amount of
$1,402,163 were converted into common shares of the Company.
Net cash used in operating activities was $6,687,350 for the nine months
ended September 30, 2000, including a net loss of $15,263,959 and an increase
in payables of $627,758. This compares with net cash used in operating
activities of $2,210,724 for the nine months ended September 30, 1999,
including a net loss of $2,762,714 and an increase in payables of $517,082. For
the nine months ended September 30, 2000, the Company recorded non-cash
transactions of $4,293,000 relating to the issuance of stock options to a
non-employee consultant, a charge of $193,000 for the beneficial conversion
feature on convertible debt and convertible line of credit issued during the
period, $1,080,000 and $650,000 relating to the issuance of warrants and the
modification of convertible debt during one period and $1,354,700 for the
amortization of the deferred interest from the issuance of detachable warrants
issued during the period. This compares with no such non-cash transactions for
the nine months ended September 30, 1999. The Company's current operating
expenditures are approximately $800,000 per month and the Company plans to
increase its operating expenditures to $1,100,000 a month in order to expand
its operations. The Company has not generated any revenues to date and does not
anticipate cash flow from operations to be sufficient to fund its cash
requirements until early in the year 2002.
The Company incurred net capital expenditures of $180,785 for the nine
months ended September 30, 2000, compared with $87,977 for the nine months
ended September 30, 1999. These expenditures were primarily for laboratory
equipment associated with the Company's continued research and development.
Based on its existing capital resources, the Company believes that it will
be able to fund operations through September 2001. The Company's capital
requirements depend on several factors, including the
30
<PAGE>
success and progress of research development programs, the resources devoted to
developing products, the extent to which products achieve market acceptance,
and other factors. The Company anticipates that it will require substantial
additional financing to fund its working capital requirements. There can be no
assurance, however, that additional funding will be available or, if available,
that it will be available on terms acceptable to the Company. There can be no
assurance that the Company will be able to raise additional cash if its cash
resources are exhausted. The Company's ability to arrange such financing in the
future will depend in part upon the prevailing capital market conditions as
well as the Company's business performance.
The Company has been in the development stage since its inception. It has
had no operating revenue to date, has accumulated losses of $25,935,293 and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including some types of derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS
133, as amended by SFAS No. 137 defining SFAS No. 133's effective date, is
effective for fiscal years beginning after September 15, 2000, and must be
applied to instruments issued, acquired, or substantively modified after
December 31, 1997. Also, Statement Of Position 98-5, "Reporting the Costs of
Start-up Activities" is effective for the year ended January 1, 2000. The
Company does not expect the adoption of either of the above accounting
pronouncements to have a material effect on its financial position or results
of operations.
31
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
Index to Financial Statements
<TABLE>
<S> <C>
Consolidated Condensed Financial Statements
Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 ............... F-2
Statements of Operations for the three and nine month periods ended September 30, 2000
and September 30, 1999 (unaudited), and the period from September 25, 1997 (inception)
to September 30, 2000 (unaudited) ..................................................... F-3
Statement of Stockholders' Equity (Deficit) -- nine months ended September 30, 2000 and
the twelve months ended December 31, 1999 ............................................. F-4
Statements of Cash Flows for the three and nine month periods ended September 30, 2000
and September 30, 1999 (unaudited) and the period from September 25, 1997 (inception)
to September 30, 2000 (unaudited) ..................................................... F-5
Notes to Consolidated Condensed Financial Statements ...................................... F-6
Report of Independent Certified Public Accountants ........................................ F-11
Report of Independent Public Accountants .................................................. F-12
Consolidated Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999 and 1998 ....................... F-13
Statements of Operations for the six months ended June 30, 2000 and 1999 (unaudited), the
years ended December 31, 1999 and 1998, the period from September 25, 1997 (inception)
to December 31, 1997, and the period from September 25, 1997 (inception) to June 30,
2000................................................................................... F-14
Statements of Changes in Stockholders' Deficit for the six months ended June 30, 2000
and the years ended December 31, 1999 and 1998, and the period from September 25, 1997
(inception) to December 31, 1997 ...................................................... F-15
Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (unaudited), the
years ended December 31, 1999 and 1998, the period from September 25, 1997 (inception)
to December 31, 1997, and the period from September 25, 1997 (inception) to June 30,
2000 .................................................................................. F-16
Notes to Consolidated Financial Statements .............................................. F-17
</TABLE>
F-1
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................................... $ 11,916,493 $ 2,030,139
Prepaid and other ................................................... 183,260 150,989
------------- -------------
Total Current Assets ................................................. 12,099,753 2,181,128
Furniture and Equipment, net ......................................... 373,311 241,100
------------- -------------
Total Assets ......................................................... $ 12,473,064 $ 2,422,228
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses ............................... $ 1,896,161 $ 1,268,404
Due to related parties .............................................. 568,501 360,711
Current portion of convertible notes payable ........................ -- 650,577
Due to shareholder .................................................. -- 1,316,712
------------- -------------
Total Current Liabilities ............................................ 2,464,662 3,596,404
Convertible Line of Credit, net of discount of $104,500 .............. 904,541 --
Convertible Notes Payable, net of discount of $2,537,800 ............. 2,011,639 2,105,480
Other Long Term Liabilities .......................................... 42,151 39,969
------------- -------------
Total Liabilities .................................................... 5,422,993 5,741,853
------------- -------------
Stockholders' Equity (Deficit) .......................................
Preferred stock, no par value; 10,000,000 shares authorized, 0 issued
and outstanding ................................................... -- --
Common stock, $.001 par value; 100,000,000 shares authorized,
42,907,526 and 41,001,609 issued and outstanding .................. 42,908 41,001
Additional paid in capital .......................................... 32,942,456 7,310,708
Deficit accumulated during the development stage .................... (25,935,293) (10,671,334)
------------- -------------
Total Stockholders' Equity (Deficit) ................................. 7,050,071 (3,319,625)
------------- -------------
Total Liabilities and Stockholders' Equity (Deficit) ................. $ 12,473,064 $ 2,422,228
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-2
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
(unaudited)
<TABLE>
<CAPTION>
Cumulative Amounts
From Inception
(September 25, 1997) Three Months Ended
Through September 30, September 30,
----------------------- ----------------------------------
(unaudited)
2000 2000 1999
----------------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING EXPENSES
Research and development ................... $ 8,707,016 $ 1,349,084 $ 655,678
General and administrative ................. 7,841,960 1,049,974 351,277
Marketing .................................. 4,631,294 112,448 --
------------- ------------ ------------
Total operating expenses .................... 21,180,270 2,511,506 1,006,955
------------- ------------ ------------
OTHER EXPENSES
Interest expense, net ...................... 4,612,161 2,669,202 97,301
Taxes ...................................... 142,862 64,291 1,000
------------- ------------ ------------
Net loss .................................... $ (25,935,293) $ (5,244,999) $ (1,105,256)
============= ============ ============
Net loss per share -- basic and diluted ..... $ (0.13) $ (0.04)
============ ============
Weighted average number of shares of
common stock outstanding -- basic
and diluted ................................ 41,698,933 29,250,000
============ ============
[RESTUB TABLE]
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
(unaudited)
2000 1999
----------------- ----------------
<S> <C> <C>
OPERATING EXPENSES
Research and development ................... $ 3,267,122 $ 1,717,983
General and administrative ................. 3,030,269 906,140
Marketing .................................. 4,631,294 --
------------- ------------
Total operating expenses .................... 10,928,685 2,624,123
------------- ------------
OTHER EXPENSES
Interest expense, net ...................... 4,259,462 126,591
Taxes ...................................... 75,812 12,000
------------- ------------
Net loss .................................... $ (15,263,959) $ (2,762,714)
============= ============
Net loss per share -- basic and diluted ..... $ (.37) $ (0.09)
============= ============
Weighted average number of shares of
common stock outstanding -- basic
and diluted ................................ 41,234,050 29,238,000
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-3
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Shares Amount
------------ -----------
<S> <C> <C>
Constellation 3D, Inc. Activities
Balance, January 1, 1999 ............................. 29,214,000 $ 29,214
Debt settlement through the issuance of common
stock -- April 1, 1999 .............................. 36,000 36
Common stock issued in connection with reverse
acquisition -- October 1, 1999 ...................... 11,109,765 11,109
Conversion of notes payable -- October 22, 1999 608,835 609
Sale of common stock for cash, net November 1,
1999 ................................................ 25,509 25
Issuance of common stock for services
November 8, 1999 .................................... 7,500 8
Beneficial conversion discount of convertible debt
-- November 11, 1999 ................................ -- --
Net loss ............................................. -- --
---------- --------
Balance, December 31, 1999 ........................... 41,001,609 41,001
Deferred interest relating to issuance of detachable
warrants -- March 24, 2000 .......................... -- --
Beneficial conversion discount of convertible debt
-- March 24, 2000 ................................... -- --
Noncash stock-based compensation relating to
issuance of stock options to consultant --
May 11, 2000 ........................................ -- --
Issuance of common stock for cash --
August 17, 2000 ..................................... 25,000 25
Warrants issued relating to legal services rendered
-- August 18, 2000 .................................. -- --
Beneficial conversion discount of convertible line
of credit -- August 23, 2000 ........................ -- --
Deferred interest relating to issuance of detachable
warrants on line of credit -- August 23, 2000 ....... -- --
Conversion of loan payable -- August 23, 2000 ........ 138,102 138
Conversion of notes payable -- August 23, 2000 ....... 166,097 166
Issuance of warrants and modification of conver-
sion terms in connection with convertible debt
and shareholder loans ............................... -- --
Issuance of common stock for cash --
August 23, 2000 ..................................... 492,459 493
Warrants issued in connection with the acquisition
of patents -- August 28, 2000 ....................... -- --
Issuance of common stock for cash --
August 31, 2000 ..................................... 197,026 197
Conversion of notes payable --
September 12, 2000 .................................. 380,000 380
Issuance of common stock for cash --
September 12, 2000 .................................. 14,774 15
Issuance of common stock for cash --
September 19, 2000 .................................. 492,459 493
Net loss ............................................. -- --
---------- --------
Balance, September 30, 2000 (unaudited) .............. 42,907,526 $ 42,908
========== ========
</TABLE>
<PAGE>
[RESTUB TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-in Capital Development Stage Total
----------------- ------------------- ----------------
<S> <C> <C> <C>
Constellation 3D, Inc. Activities
Balance, January 1, 1999 ............................. $ 4,859,326 $ (5,804,647) $ (916,107)
Debt settlement through the issuance of common
stock -- April 1, 1999 .............................. 241,454 -- 241,490
Common stock issued in connection with reverse
acquisition -- October 1, 1999 ...................... 942,096 -- 953,205
Conversion of notes payable -- October 22, 1999 1,014,116 -- 1,014,725
Sale of common stock for cash, net November 1,
1999 ................................................ 99,974 -- 99,999
Issuance of common stock for services
November 8, 1999 .................................... 28,742 -- 28,750
Beneficial conversion discount of convertible debt
-- November 11, 1999 ................................ 125,000 -- 125,000
Net loss ............................................. -- (4,866,687) (4,866,687)
------------ ------------- --------------
Balance, December 31, 1999 ........................... 7,310,708 (10,671,334) (3,319,625)
Deferred interest relating to issuance of detachable
warrants -- March 24, 2000 .......................... 3,880,000 -- 3,880,000
Beneficial conversion discount of convertible debt
-- March 24, 2000 ................................... 120,000 -- 120,000
Noncash stock-based compensation relating to
issuance of stock options to consultant --
May 11, 2000 ........................................ 4,293,000 -- 4,293,000
Issuance of common stock for cash --
August 17, 2000 ..................................... 249,975 -- 250,000
Warrants issued relating to legal services rendered
-- August 18, 2000 .................................. 50,000 -- 50,000
Beneficial conversion discount of convertible line
of credit -- August 23, 2000 ........................ 73,000 -- 73,000
Deferred interest relating to issuance of detachable
warrants on line of credit -- August 23, 2000 ....... 117,000 -- 117,000
Conversion of loan payable -- August 23, 2000 ........ 1,402,025 -- 1,402,163
Conversion of notes payable -- August 23, 2000 ....... 1,686,233 -- 1,686,399
Issuance of warrants and modification of conver-
sion terms in connection with convertible debt
and shareholder loans ............................... 1,730,000 -- 1,730,000
Issuance of common stock for cash --
August 23, 2000 ..................................... 4,614,562 -- 4,615,055
Warrants issued in connection with the acquisition
of patents -- August 28, 2000 ....................... 56,000 -- 56,000
Issuance of common stock for cash --
August 31, 2000 ..................................... 1,920,212 -- 1,920,409
Conversion of notes payable --
September 12, 2000 .................................. 681,194 -- 681,574
Issuance of common stock for cash --
September 12, 2000 .................................. 143,985 -- 144,000
Issuance of common stock for cash --
September 19, 2000 .................................. 4,614,562 -- 4,615,055
Net loss ............................................. -- (15,263,959) (15,263,959)
------------ ------------- --------------
Balance, September 30, 2000 (unaudited) .............. $ 32,942,456 $ (25,935,293) $ 7,050,071
============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-4
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Cumulative
Amounts From
Inception
(September 25,
1997) Through Three Months
September 30, Ended September 30,
----------------- ----------------------------------
2000 2000 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ....................................... $ (25,935,293) $ (5,244,999) $ (1,105,256)
Adjustments to reconcile net loss to net cash
used in operating activities: .................
Noncash stock-based compensation ............... 4,321,750 -- --
Beneficial conversion feature .................. 318,000 73,000 --
Discount amortization on deferred interest ..... 1,354,700 662,096 --
Interest expense relating to issuance of
warrants ...................................... 1,080,000 1,080,000 --
Interest expense relating to modification of
debt conversion rates ......................... 650,000 650,000 --
Depreciation ................................... 127,936 18,550 8,107
Write down of furniture and equipment .......... 49,750 -- --
Warrants issued relating to legal services
rendered ...................................... 50,000 50,000 --
Warrants issued relating to acquisition of
patents ....................................... 56,000 56,000 --
Change in assets and liabilities:
Prepaid and other .............................. (198,194) 14,009 (72,955)
Accounts payable ............................... 1,896,988 384,305 92,491
Accrued interest on convertible notes
payable ....................................... 198,270 (58,781) --
Accrued interest on shareholder loans .......... 85,455 20,633 --
Accrued interest on line of credit ............. 9,041 9,041 --
------------- ------------ ------------
Net Cash Used in Operating Activities ........... (15,935,597) (2,286,146) (1,077,613)
------------- ------------ ------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment ...... (632,927) (103,020) (21,968)
Sale of property, plant and equipment .......... 80,405 -- 42,576
Business acquisition, net of cash acquired ..... 1,019,413 -- --
------------- ------------ ------------
Net Cash Provided (Used in) Investing
Activities ..................................... 466,891 (103,020) 20,608
------------- ------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock ......... 16,533,057 11,544,517 --
Proceeds from issuance of convertible debt ..... 7,700,000 -- --
Proceeds from borrowings on line of credit ..... 1,000,000 1,000,000 --
Proceeds from shareholders loan ................ 1,541,490 -- --
Net changes in other long-term debt ............ 42,151 (15,306) (6,074)
Advances from (repayments to) related party 568,501 7,993 20,297
Advances from parent company ................... -- -- 1,230,927
------------- ------------ ------------
Net Cash Provided by Financing Activities ....... 27,385,199 12,537,204 1,245,150
------------- ------------ ------------
Net Increase in Cash and Cash Equivalents ....... 11,916,493 10,148,038 188,145
Cash and Cash Equivalents, beginning of
period ......................................... -- 1,768,455 112,800
------------- ------------ ------------
Cash and Cash Equivalents, end of period ........ $ 11,916,493 $ 11,916,493 $ 300,945
============= ============ ============
Non-cash Financing Activity .....................
Deferred financing cost related to detachable
warrants ...................................... $ 3,997,000 $ 117,000 $ --
Conversion of notes payable .................... 3,382,698 2,367,973 --
Conversion of loans payable .................... 1,643,653 1,402,163 --
Net assets disposed of upon acquisition ........ 66,028 -- --
Stock issued in reverse acquisition ............ 953,205 -- --
============= ============ ============
</TABLE>
<PAGE>
[RESTUB TABLE]
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss ....................................... $ (15,263,959) $ (2,762,714)
Adjustments to reconcile net loss to net cash
used in operating activities: .................
Noncash stock-based compensation ............... 4,293,000 --
Beneficial conversion feature .................. 193,000 --
Discount amortization on deferred interest ..... 1,354,700 --
Interest expense relating to issuance of
warrants ...................................... 1,080,000 --
Interest expense relating to modification of
debt conversion rates ......................... 650,000 --
Depreciation ................................... 48,573 42,100
Write down of furniture and equipment .......... -- 49,750
Warrants issued relating to legal services
rendered ...................................... 50,000 --
Warrants issued relating to acquisition of
patents ....................................... 56,000 --
Change in assets and liabilities:
Prepaid and other .............................. (32,271) (56,942)
Accounts payable ............................... 627,758 517,082
Accrued interest on convertible notes
payable ....................................... 161,353 --
Accrued interest on shareholder loans .......... 85,455 --
Accrued interest on line of credit ............. 9,041 --
------------- ------------
Net Cash Used in Operating Activities ........... (6,687,350) (2,210,724)
------------- ------------
Cash Flows From Investing Activities
Purchase of property, plant and equipment ...... (180,785) (130,553)
Sale of property, plant and equipment .......... -- 42,576
Business acquisition, net of cash acquired ..... -- --
------------- ------------
Net Cash Provided (Used in) Investing
Activities ..................................... (180,785) (87,977)
------------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock ......... 11,544,517 --
Proceeds from issuance of convertible debt ..... 4,000,000 --
Proceeds from borrowings on line of credit ..... 1,000,000 --
Proceeds from shareholders loan ................ -- 241,490
Net changes in other long-term debt ............ 2,182 (2,396)
Advances from (repayments to) related party 207,790 (228,309)
Advances from parent company ................... -- 2,465,764
------------- ------------
Net Cash Provided by Financing Activities ....... 16,754,489 2,476,549
------------- ------------
Net Increase in Cash and Cash Equivalents ....... 9,886,354 177,848
Cash and Cash Equivalents, beginning of
period ......................................... 2,030,139 123,097
------------- ------------
Cash and Cash Equivalents, end of period ........ $ 11,916,493 $ 300,945
============= ============
Non-cash Financing Activity .....................
Deferred financing cost related to detachable
warrants ...................................... $ 3,997,000 $ --
Conversion of notes payable .................... 2,367,973 --
Conversion of loans payable .................... 1,402,163 241,490
Net assets disposed of upon acquisition ........ -- --
Stock issued in reverse acquisition ............ -- --
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statement
F-5
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. Business Description
Constellation 3D, Inc., a Florida corporation ("C3D"); together with all
of its subsidiaries, (the "Company"), was incorporated on December 27, 1995,
under the name Latin Venture Partners, Inc. The name of the company was changed
to C3D Inc. on March 24, 1999 in anticipation of a transaction with
Constellation 3D Technology Limited, a British Virgin Islands company
("Constellation Tech").
On October 1, 1999, C3D completed the acquisition of Constellation Tech,
which was treated as a reverse acquisition whereby C3D was acquired by
Constellation Tech, with the balance sheets being combined using each company's
historical cost bases. The results of operations include those of both
companies from the date of acquisition. The financial statements for the period
prior to the date of acquisition are those of Constellation Tech. As the
transaction was a reverse acquisition with a public shell, no pro forma
information related to this transaction is provided. The equity (deficit)
section of the balance sheet and the earnings per share of the Company are
retroactively restated to reflect the effect of the exchange ratio established
in the asset purchase agreement.
The consolidated condensed financial statements of the Company include the
accounts of its subsidiaries after elimination of intercompany balances and
transactions.
On December 27, 1999, as approved by the requisite number of shares at the
Annual Meeting of Shareholders, C3D, Inc. changed its name to Constellation 3D,
Inc. effective December 29, 1999, and amended its Articles of Incorporation to
allow for an increase in the number of shares authorized from 50,000,000 shares
to 100,000,000 shares of Common Stock ($.001 par value). In addition, the
Company is authorized to issue 10,000,000 shares of preferred stock (no par
value). On January 18, 2000, a three-for-one forward split of C3D's Common
Stock took effect for shareholders of record as of December 16, 1999, and all
per share information for all prior periods have been adjusted accordingly.
The Company has developed what it believes to be a state-of-the-art
optical, data storage product that surpasses the physical limits of
two-dimensional memory technology. Research and development work on the
Company's technology has been conducted and is being conducted in the United
States, Israel, Russia and Ukraine.
NOTE 2. Basis of Presentation
The accompanying consolidated condensed interim financial statements of
the Company are unaudited and include, in the opinion of management, all normal
recurring adjustments necessary to present fairly the consolidated condensed
balance sheets as of September 30, 2000, and the related consolidated condensed
statements of operations, stockholders' equity (deficit) and cash flows for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These consolidated
condensed interim financial statements should be read in conjunction with the
Company's audited consolidated condensed financial statements and the related
notes thereto included in C3D's amended Form 10-K filed with the Securities and
Exchange Commission on March 31, 2000.
The results of operations and the cash flows presented for the three
months ended September 30, 2000 and 1999 and the results of operations and the
cash flows for the nine months ended September 30, 2000 and 1999, are not
necessarily indicative of the results to be expected for any other interim
period or any future fiscal year.
The Company has been in the development stage since its inception. It has
had no operating revenue to date, has accumulated losses of $25,935,293 and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses.
F-6
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
NOTE 2. Basis of Presentation -- (Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including some
types of derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133, as
amended by SFAS No. 137 defining SFAS No. 133's effective date, is effective
for fiscal years beginning after June 15, 2000, and must be applied to
instruments issued, acquired, or substantively modified after December 31,
1997.
In March 2000, the Financial Accounting Standards Board released
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). FIN 44 addresses certain practice issues related to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). FIN 44 applies only to companies that have chosen not to
adopt SFAS 123, Accounting for Stock-Based Compensation, for transactions with
employees. Among other issues, FIN 44 clarifies (a) the definition of an
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either December
15, 1998 or January 12, 2000. To the extent that FIN 44 covers events occurring
during the periods after December 15, 1998 or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying FIN 44 are recognized
on a prospective basis from July 1, 2000.
The Company does not expect the adoption of either of the above accounting
pronouncements to have a material effect on its financial position or results
of operations.
Effective January 1, 1999, the Company adopted Statement of Position 98-5
("SOP 98-5"), Reporting on the Costs of Start-Up Activities, issued by the
American Institute of Certified Public Accountants. SOP 98-5 establishes
guidance on the financial reporting of start-up costs and organization costs.
The Statement requires that costs of start-up activities and organization costs
be expenses as incurred. The effect of adopting this standard was not material
to the Company.
NOTE 3. Income Taxes
The Company records its provision for income taxes using the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on the anticipated future tax effects arising from the differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases. A 100% valuation allowance has been recorded
against the deferred tax asset as management has yet to establish that recovery
of this asset is more likely than not.
NOTE 4. Net Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during each period. Diluted
earnings per share reflect, in periods in which they have a dilutive effect,
the effect of common shares issuable upon exercise of stock options, warrants
and contingent shares, based on the treasury method of computing such effects,
and are not included in the calculation of loss per share, as their effect was
anti-dilutive. On January 18, 2000, a three-for-one forward split of C3D's
Common Stock took effect for shareholders of record as of December 16, 1999,
and all per share information for all prior periods have been adjusted
accordingly.
F-7
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
NOTE 5. Stockholders' Equity
On August 23, 2000, a shareholder loan in the principal amount of
$1,300,000 plus accrued interest of $102,163 was converted into 138,102 shares
of common stock at $10.1531 per share. The shareholder also received one-year
warrants to purchase 69,051 shares of common stock at an exercise price of
$10.1531 per share and five-year warrants to purchase 55,241 shares of common
stock at an exercise price of $14.6656 per share. The fair value ascribed to
the warrants was approximately $490,000 based on the Black-Scholes
option-pricing model; such amount was recorded as interest expense and as an
addition to paid-in capital of stockholders' equity.
On August 23, 2000, an aggregate principal amount of $1,600,000 plus
accrued interest of $86,399 of 8% convertible notes was converted into 166,097
shares of common stock at a conversion rate of $10.1531 per share. The
conversion price was amended to $10.1531 from $16.67 which resulted in
additional interest expense of $650,000 based on the excess of the fair values
of all securities transferred in excess of the fair value of securities
issuable pursuant to the original conversion terms; such amount was recorded as
interest expense and as an addition to paid-in capital of stockholders' equity.
The noteholder also received one-year warrants to purchase 83,048 shares of
common stock at an exercise price of $10.1531 per share and five-year warrants
to purchase 66,439 shares of common stock at an exercise price of $14.6656 per
share. The fair value ascribed to the warrants was approximately $590,000 based
on the Black-Scholes option-pricing model; such amount was recorded as interest
expense and as an addition to paid-in capital of stockholders' equity.
On August 23, 2000, the Company sold 492,459 shares of common stock to
Halifax Fund, L.P.("Halifax") for an aggregate of $4,615,055 net of cost of
financing. In connection with this sale, the Company issued the following
warrants to Halifax: (1) five-year warrants to purchase 196,984 shares of
common stock at the initial exercise price of $14.6656 per share, (2)
adjustment warrants to purchase a number of shares of common stock pursuant to
a certain formula (as defined in the agreement), and (3) one-year warrants to
purchase 246,229 shares of common stock at the initial exercise price of
$10.15313 per share. In connection with this sale, the Company granted Halifax
certain registration rights with respect to 492,459 shares of common stock and
the underlying shares to be issued upon the exercise of the above described
warrants.
On August 31, 2000, the Company sold 197,026 shares of common stock for an
aggregate of $2,000,426 to Koor Underwriters and Issuers Ltd. ("Koor"). In
connection with this sale, the Company issued the following warrants: (1)
five-year warrants to purchase 78,813 shares of common stock at the initial
exercise price of $14.6656 per share, (2) adjustment warrants to purchase a
number of shares of common stock pursuant to a certain formula (as defined in
the agreement), and (3) one-year warrants to purchase 98,513 shares of common
stock at the initial exercise price of $10.15313 per share. In connection with
this sale, the Company granted Koor certain registration rights with respect to
197,026 shares of the common stock and the underlying shares to be issued upon
the exercise of the above described warrants.
On September 12, 2000, an aggregate principal amount of $600,000 plus
accrued interest of $81,574 of a convertible note, dated December 2, 1998, was
converted into 380,000 shares of common stock at $1.794 per share.
On September 19, 2000, the Company sold an additional 492,459 shares of
common stock to Halifax for an aggregate of $4,615,055 net of cost of
financing. In connection with this additional investment, the Company amended
the investment agreement for the following additional warrants to Halifax: (1)
five-year warrants to purchase 196,984 shares of common stock at the initial
exercise price of $14.6656 per share, (2) adjustment warrants to purchase a
number of shares of common stock pursuant to a certain formula (as defined in
the agreement), and (3) one-year warrants to purchase 246,229 shares of common
stock at the initial exercise price of $10.15313 per share. In connection with
this sale, the Company granted Halifax certain registration rights with respect
to 492,459 shares of common stock and the underlying shares to be issued upon
the exercise of the above described warrants.
F-8
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
NOTE 5. Stockholders' Equity -- (Continued)
Convertible line of credit
On August 23, 2000, the Company established a credit line of up to $6
million with Constellation 3D Technology Limited, a British Virgin Islands
company. The interest rate for each withdrawal will be the interest rate of
three-month LIBOR plus 3%. Constellation 3D Technology Limited has the right to
convert the outstanding loan amount together with accrued interest into equity
at a price per share of 90% of the average closing price of the Company's
common stock for the 12 trading days prior to August 23, 2000, which was
$10.72. In connection with this credit line, Constellation 3D Technology
Limited will receive a three-year warrant to purchase 20,000 shares of the
Company common stock upon signing the Loan Agreement and a three-year warrant
to purchase 10,000 shares of the Company common stock upon each withdrawal made
by the Company from this credit line. The purchase price of the above-stated
warrants is equal to 100% of the closing price of the Company's common stock on
August 23, 2000, being $11.50. Up to one year from the Company's last
withdrawal from the credit line, Constellation 3D Technology Limited will have
the right to purchase additional shares of the Company's common stock for not
less than $2,000,000. On August 28, 2000, the Company issued a Convertible Note
to Constellation 3D Technology Limited in the principal sum of $1,000,000.
Stock options
The shareholders approved the 1999 stock option plan (the "Plan") on
December 27, 1999. The Plan allows the Company to grant stock options to its
officers, key employees, directors and other important consultants at prices
not less than fair market value at the date of grant. A maximum of 4,617,540
shares were approved to be issued under the Plan. As at September 30, 2000
there were 3,871,550 options under this Plan outstanding and 1,365,000 options
outside of the Plan outstanding.
The following table summarizes information about stock options outstanding
and exercisable as at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Number Weighted Weighted Number Weighted
Outstanding as Average Average Exercisable as Average
Range of at September 30, Contractual Exercise at September 30, Exercise
Exercise Price 2000 Life Price 2000 Price
---------------- ------------------ ------------- ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.33 525,000 4.72 $ 1.33 525,000 $ 1.33
$ 5.00 450,000 4.62 $ 5.00 450,000 $ 5.00
$11.25 390,000 3.90 $ 11.25 150,000 $ 11.25
$10.69 3,871,550 4.62 $ 10.69 1,622,750 $ 10.69
-------------- --------- ---- ------- --------- -------
$1.33 - $11.25 5,236,550 4.58 $ 9.26 2,747,750 $ 7.33
-------------- --------- ---- ------- --------- -------
</TABLE>
NOTE 6. Legal Proceedings
On June 9, 2000, Challis International Limited ("Challis") commenced a
lawsuit in the Supreme Court of the State of New York, County of New York,
against Constellation Tech and C3D. The Complaint alleges that Challis entered
into several contracts with Constellation Tech or its predecessor-in-interest
pursuant to which Constellation Tech agreed to provide Challis with 11.946% of
the shares it would receive in C3D. Although C3D is not a party to any of the
contracts upon which Challis bases its claims, Challis seeks to hold C3D liable
based on allegations that C3D is the alter-ego of Constellation Tech, and that
an officer of C3D signed an appendix to one of the contracts between Challis
and Constellation Tech. Challis alleges that it is entitled to 3,494,205 shares
of C3D. The complaint seeks an order directing the defendants to issue proper
certificates
F-9
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) -- (Continued)
NOTE 6. Legal Proceedings -- (Continued)
to Challis for 3,494,205 shares of C3D or, if specific performance is not
granted, the fair market value of the shares, plus any incidental damages. The
Company believes that the outcome will not have a material adverse effect on
the Company's financial positions, results of operations and cash flows.
NOTE 7. Subsequent Events
On October 12, 2000, an aggregate principal amount of $500,000 plus
accrued interest of approximately $44,507 of 8% convertible notes was converted
into 49,500 shares of common stock at a conversion price of $11.00 per share.
The noteholder also received one-year warrants to purchase 15,000 shares of
common stock at an exercise price of $10.1531. The issuance contains certain
registration rights with respect to the underlying common stock.
F-10
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
Constellation 3D, Inc.
We have audited the accompanying consolidated balance sheet of
Constellation 3D, Inc. (a development stage company) and its subsidiaries (the
"Company") as of June 30, 2000 and the related consolidated statements of
operations, stockholders' deficit and cash flows for the six months ended June
30, 2000 and the period from September 25, 1997 (inception) through June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of
Constellation 3D, Inc. for the period from inception (September 25, 1997) to
December 31, 1999. Such statements are included in the cumulative September 25,
1997 (inception) to June 30, 2000 totals of statements of operations and cash
flows and reflect a net loss of 48% of the related cumulative total. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts for the period from inception
(September 25, 1997) to December 31, 1999 included in the cumulative totals, is
based solely upon the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Constellation 3D, Inc. (a
development stage company) and its subsidiaries at June 30, 2000, and the
results of their operations and their cash flows for the six months then ended
and for the period from September 25, 1997 (inception) through June 30, 2000 in
conformity with generally accepted accounting principles.
BDO Seidman LLP
New York, New York
July 21, 2000, (except for Note 10 which
is as of September 19, 2000)
F-11
<PAGE>
Report of Independent Public Accountants
Board of Directors and Stockholders of
Constellation 3D, Inc.
We have audited the accompanying consolidated balance sheets of Constellation
3D, Inc. (a development stage company) and its subsidiaries (the "Company") as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1999 and 1998, the period from inception (September 25, 1997) through
December 31, 1997, and the period from inception (September 25, 1997) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Israel, which do not differ in any material respects from auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of
Constellation 3D, Inc. (a development stage company) and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the years ended December 31, 1999 and 1998, the period from inception
(September 25, 1997) through December 31, 1997 and the period from inception
(September 25, 1997) through December 31, 1999 in conformity with generally
accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has generated
no operating revenue to date and will need to raise additional working capital
for future development costs. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO International
Tel-Aviv, Israel
February 22, 2000, (except for Note 11 which
is as of March 24, 2000)
F-12
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ............................ $ 1,768,455 $ 2,030,139 $ 123,097
Prepaid and other .................................... 197,269 150,989 171,261
------------- ------------- ------------
Total Current Assets .................................. 1,965,724 2,181,128 294,358
Furniture and Equipment, net .......................... 288,842 241,100 267,231
------------- ------------- ------------
Total Assets .......................................... $ 2,254,566 $ 2,422,228 $ 561,589
============= ============= ============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current Liabilities
Current portion of convertible notes payable ......... $ 674,481 $ 650,577 $ 377,624
Accounts payable and accrued expenses ................ 1,511,857 1,268,404 630,457
Due to related parties ............................... 560,508 360,711 422,790
Due to shareholder ................................... 1,381,534 1,316,712 --
------------- ------------- ------------
Total Current Liabilities ............................. 4,128,380 3,596,404 1,430,871
Convertible Notes Payable, net, less current portion . 3,114,314 2,105,480 --
Other Long-Term Liabilities ........................... 57,457 39,969 46,825
------------- ------------- ------------
Total Liabilities ..................................... 7,300,151 5,741,853 1,477,696
------------- ------------- ------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, no par value; 10,000,000 shares
authorized; 0 issued and outstanding ............... -- -- --
Common stock, $.001 par value; 100,000,000
shares authorized; 41,001,609, 41,001,609 and
29,214,000 issued and outstanding .................. 41,001 41,001 29,214
Additional paid in capital ........................... 15,603,708 7,310,708 4,859,326
Deficit accumulated during the development stage (20,690,294) (10,671,334) (5,804,647)
------------- ------------- ------------
Total Stockholders' Deficit ........................... (5,045,585) (3,319,625) (916,107)
------------- ------------- ------------
Total Liabilities and Stockholders' Deficit ........... $ 2,254,566 $ 2,422,228 $ 561,589
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Amounts From
Inception
(September 25, 1997) Six Months
Through June 30, Ended June 30,
---------------------- -----------------------------------
(unaudited)
2000 2000 1999
---------------------- ----------------- ----------------
<S> <C> <C> <C>
OPERATING EXPENSES
Research and development ............... $ 7,357,932 $ 1,918,038 $ 1,062,305
General and administrative ............. 6,791,986 1,980,295 554,863
Marketing .............................. 4,518,846 4,518,846 --
-------------- ------------- ------------
Total operating expenses ................ 18,668,764 8,417,179 1,617,168
OTHER EXPENSES ..........................
Interest (income) expense, net ......... 1,942,959 1,590,260 29,290
Taxes .................................. 78,571 11,521 11,000
-------------- ------------- ------------
Net loss ................................ $ (20,690,294) $ (10,018,960) $ (1,657,458)
============== ============= ============
Net loss per share -- basic and diluted $ (0.24) $ (0.06)
============= ============
Weighed average number of shares of
common stock outstanding -- basic
and diluted ............................ 41,001,609 29,214,000
[RESTUB TABLE]
<CAPTION>
Period From
Inception
(September 25, 1997)
Years Ended Through
December 31, December 31,
---------------------------------- ---------------------
1999 1998 1997
---------------- ---------------- ---------------------
<S> <C> <C> <C>
OPERATING EXPENSES
Research and development ............... $ 2,413,239 $ 1,534,948 $ 1,491,707
General and administrative ............. 2,084,027 1,660,477 1,067,187
Marketing .............................. -- -- --
------------ ------------ -------------
Total operating expenses ................ 4,497,266 3,195,425 2,558,894
OTHER EXPENSES ..........................
Interest (income) expense, net ......... 305,833 (6,985) 53,851
Taxes .................................. 63,588 3,462 --
------------ ------------ -------------
Net loss ................................ $ (4,866,687) $ (3,191,902) $ (2,612,745)
============ ============ =============
Net loss per share -- basic and diluted $ (0.15) $ (6.80) $ (4,354.57)
============ ============ =============
Weighed average number of shares of
common stock outstanding -- basic
and diluted ............................ 32,148,978 469,275 600
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
-------------------------- Additional Development
Shares Amount Paid-in Capital Stage Total
------------ ------------ ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 25, 1997 ................ -- $ -- $ -- $ -- $ --
Constellation 3D, Inc. Activities
(Formerly Constellation 3D Holdings):
Issuance of common stock for cash .......... 600 3 -- -- 3
Net loss ................................... -- -- -- (2,612,745) (2,612,745)
--- --------- ----------- ------------- -------------
Balance, December 31, 1997 ................. 600 3 -- (2,612,745) (2,612,742)
Issuance of common stock for
cancellation of shareholders'
advances, December 27, 1998 ............... 3,749,400 39,906 4,848,631 -- 4,888,537
Recapitalization, December 27, 1998 ........ 25,464,000 (10,695) 10,695 -- --
Net loss ................................... -- -- -- (3,191,902) (3,191,902)
---------- --------- ----------- ------------- -------------
Balance, December 31, 1998 ................. 29,214,000 29,214 4,859,326 (5,804,647) (916,107)
Debt settlement through the issuance of
common stock -- April 1, 1999 ............. 36,000 36 241,454 -- 241,490
Common stock issued in connection
with reverse acquisition -- October 1,
1999 ...................................... 11,109,765 11,109 942,096 -- 953,205
Conversion of notes payable
($1.67/share) -- October 22, 1999 ......... 608,835 609 1,014,116 -- 1,014,725
Sale of common stock for cash, net
($4.90/share) November 1, 1999 ............ 25,509 25 99,974 -- 99,999
Issuance of common stock for services
($3.83/share) November 8, 1999 ............ 7,500 8 28,742 -- 28,750
Beneficial conversion discount of
Convertible debt -- November 11,
1999 ...................................... -- -- 125,000 -- 125,000
Net loss ................................... -- -- -- (4,866,687) (4,866,687)
---------- --------- ----------- ------------- -------------
Balance, December 31, 1999 ................. 41,001,609 41,001 7,310,708 (10,671,334) (3,319,625)
Deferred interest related to issuance of
detachable warrants -- March 24,
2000 ...................................... -- -- 3,880,000 -- 3,880,000
Beneficial conversion discount of
Convertible debt -- March 24, 2000 ........ -- -- 120,000 -- 120,000
Noncash stock-based compensation
related to issuance of stock options to
consultant -- May 11, 2000 ................ -- -- 4,293,000 -- 4,293,000
Net loss ................................... -- -- -- (10,018,960) (10,018,960)
---------- --------- ----------- ------------- -------------
Balance, June 30, 2000 ..................... 41,001,609 $ 41,001 $15,603,708 $ (20,690,294) $ (5,045,585)
========== ========= =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
Amounts From
Inception
(September 25,
1997) Through Six Months
June 30, Ended June 30,
---------------- -----------------------------------
(unaudited)
2000 2000 1999
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ........................................ $ (20,690,294) $ (10,018,960) $ (1,657,458)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash stock-based compensation ................ 4,321,750 4,293,000 --
Beneficial conversion feature ................... 245,000 120,000 --
Amortization of deferred financing costs ........ 692,604 692,604 --
Depreciation .................................... 109,386 30,023 33,993
Write down of furniture and equipment ........... 49,750 -- 49,750
Change in assets and liabilities:
Prepaid and other ............................... (212,203) (46,280) 16,013
Accounts payable ................................ 2,112,683 243,453 424,591
Accrued interest on convertible note Payable 233,147 196,230 --
Accrued interest on notes payable ............... 23,904 23,904 --
Accrued interest on shareholder loans ........... 64,822 64,822 --
------------- ------------- ------------
Net Cash Used in Operating Activities ............ (13,049,451) (4,401,204) (1,133,111)
------------- ------------- ------------
Cash Flows From Investing Activities
Purchase of furniture and equipment ............. (529,907) (77,765) (108,585)
Sale of furniture and equipment ................. 80,405 -- --
Cash acquired in purchase of business ........... 1,019,413 -- --
------------- ------------- ------------
Net Cash Provided by (Used in) Investing
Activities ...................................... 569,911 (77,765) (108,585)
------------- ------------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock ........... 4,988,540 -- --
Proceeds from issuance of convertible debt....... 7,100,000 4,000,000 --
Proceeds from (repayments to) shareholders
loan ........................................... 1,541,490 -- 241,490
Net changes in other long-term debt ............. 57,457 17,488 3,678
Advances from (repayments to) related
party .......................................... 560,508 199,797 (248,606)
Advances from parent company .................... -- -- 1,234,837
------------- ------------- ------------
Net Cash Provided by Financing Activities ........ 14,247,995 4,217,285 1,231,399
------------- ------------- ------------
Net increase (Decrease) in Cash and Cash
Equivalents ..................................... 1,768,455 (261,684) (10,297)
Cash and Cash Equivalents, beginning of
period .......................................... -- 2,030,139 123,097
------------- ------------- ------------
Cash and Cash Equivalents, end of period ......... $ 1,768,455 $ 1,768,455 $ 112,800
============= ============= ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid for taxes ............................. $ 78,571 $ 11,521 $ 11,000
============= ============= ============
Non-cash Investing and Financing Activities:
Deferred financing costs related to
detachable warrants ............................ $ 3,880,000 $ 3,880,000 $ --
Conversion of note payable ...................... 1,256,215 -- --
Net assets disposed of upon acquisition ......... 66,028 -- --
Stock issued in reverse acquisition ............. 953,205 -- --
Debt settlement through issuance of
common stock ................................... 241,490 -- --
============= ============= ============
<PAGE>
[RESTUB TABLE]
<CAPTION>
Period from
Inception
(September 25,
Years Ended 1997) Through
December 31, December 31,
---------------------------------- ---------------
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ........................................ $ (4,866,687) $ (3,191,902) $ (2,612,745)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash stock-based compensation ................ 28,750 -- --
Beneficial conversion feature ................... 125,000 -- --
Amortization of deferred financing costs ........ -- -- --
Depreciation .................................... 40,438 33,129 5,796
Write down of furniture and equipment ........... -- -- --
Change in assets and liabilities:
Prepaid and other ............................... 5,338 (135,214) (36,047)
Accounts payable ................................ 910,899 150,343 857,738
Accrued interest on convertible note Payable 36,917 -- --
Accrued interest on notes payable ............... -- -- --
Accrued interest on shareholder loans ........... -- -- --
------------ ------------ ------------
Net Cash Used in Operating Activities ............ (3,719,345) (3,143,644) (1,785,258)
------------ ------------ ------------
Cash Flows From Investing Activities
Purchase of furniture and equipment ............. (145,986) (200,197) (105,959)
Sale of furniture and equipment ................. 80,405 -- --
Cash acquired in purchase of business ........... 1,019,413 -- --
------------ ------------ ------------
Net Cash Provided by (Used in) Investing
Activities ...................................... 953,832 (200,197) (105,959)
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock ........... 100,000 4,888,537 3
Proceeds from issuance of convertible debt....... 3,100,000 -- --
Proceeds from (repayments to) shareholders
loan ........................................... 1,541,490 (4,152,521) 4,152,521
Net changes in other long-term debt ............. (6,856) 20,480 26,345
Advances from (repayments to) related
party .......................................... (62,079) (108,277) 531,067
Advances from parent company .................... -- -- --
------------ ------------ ------------
Net Cash Provided by Financing Activities ........ 4,672,555 648,219 4,709,936
------------ ------------ ------------
Net increase (Decrease) in Cash and Cash
Equivalents ..................................... 1,907,042 (2,695,622) 2,818,719
Cash and Cash Equivalents, beginning of
period .......................................... 123,097 2,818,719 --
------------ ------------ ------------
Cash and Cash Equivalents, end of period ......... $ 2,030,139 $ 123,097 $ 2,818,719
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid for taxes ............................. $ 63,588 $ 3,462 $ --
============ ============ ============
Non-cash Investing and Financing Activities:
Deferred financing costs related to
detachable warrants ............................ $ -- $ -- $ --
Conversion of note payable ...................... 1,014,725 -- --
Net assets disposed of upon acquisition ......... 66,208 -- --
Stock issued in reverse acquisition ............. 953,205 -- --
Debt settlement through issuance of
common stock ................................... 241,490 -- --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statement.
F-16
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are unaudited)
NOTE 1. Description of Business and Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Constellation 3D, Inc. and each of its wholly-owned subsidiaries ("C3D" or the
"Company").
The Company was incorporated on December 27, 1995, under the name Latin
Venture Partners, Inc. The name of the Company was changed to C3D Inc. on March
24, 1999 in anticipation of a transaction with Constellation 3D Technology
Limited, a British Virgin Islands company ("Constellation Tech"). On December
29, 1999, the Company changed its name from C3D Inc. to Constellation 3D, Inc.
On October 1, 1999, C3D completed an asset purchase agreement and acquired
substantially all the operations of Constellation Tech for total consideration
of 29,250,000 shares of the Company's $.001 par value common stock, and the
assumption of substantially all liabilities and obligations of Constellation
Tech. The asset purchase agreement also provided for the cancellation of
2,925,000 shares of treasury stock.
The acquisition of Constellation Tech was treated as a reverse acquisition
whereby C3D was acquired by Constellation Tech, with the balance sheets being
combined using each company's historical cost bases. The results of operations
include that of both companies from the date of acquisition forward. The
financial statements for the period prior to the date of acquisition are those
of Constellation Tech. As the transaction is a reverse acquisition with a
public shell with no operations, no pro forma information related to this
transaction is provided.
The equity section of the balance sheet and the net loss per share of the
Company are retroactively restated to reflect the effect of the exchange ratio
established in the asset purchase agreement. The Company has developed what it
believes to be a state-of-the-art optical, data storage product that surpasses
the physical limits of two-dimensional memory technology. Research and
development work on the Company's technology has been conducted and is being
conducted in the United States, Israel, Russia and Ukraine.
On December 27, 1999, as approved by the requisite number of shares at the
Annual Meeting of Shareholders, C3D Inc. changed its name to Constellation 3D,
Inc. and amended its Articles of Incorporation to allow for an increase in the
number of shares authorized from 50,000,000 shares to 100,000,000 shares of
Common Stock ($.001 par value). In addition, the Company is authorized to issue
10,000,000 shares of preferred stock (no par value). On January 18, 2000, a
three-for-one forward split of C3D's Common Stock took effect for shareholders
of record as of December 16, 1999, and all per share information for all prior
periods have been adjusted accordingly.
Principles of Consolidation -- The consolidated financial statements of
the Company include the accounts of its subsidiaries after elimination of
intercompany balances and transactions.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Furniture and Equipment -- Furniture and equipment are stated at cost.
Depreciation and amortization are computed utilizing straight-line and
accelerated methods over estimated useful lives ranging from three to seven
years.
Marketing Costs -- The Company expenses the cost of marketing and
advertising as incurred. Marketing expense includes a noncash compensation
charge of $4,293,000 for the six months ended June 30, 2000. (See Note 7)
Income Taxes -- The Company accounts for income taxes in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition
of deferred tax assets and liabilities for the expected future income tax
consequences of events that have been recognized in a company's financial
statements or tax return. Under this method,
F-17
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999
are unaudited) -- (Continued)
NOTE 1. Description of Business and Summary of Significant Accounting Policies
-- (Continued)
deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and their tax
basis using enacted tax rates in effect in the years in which the temporary
differences are expected to reverse. Valuation allowances are provided when
management determines that the realization of deferred tax assets fails to meet
the more likely than not standard imposed by SFAS 109.
Fair Value of Financial Instruments -- Carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts payable, accrued
expenses, and amounts due to related parties and shareholders approximate fair
value because of their immediate or short-term nature. The fair value of
long-term debt and convertible debt approximates their carrying value because
the stated rates of the debt either reflect recent market conditions or are
variable in nature.
Revenue Recognition -- The Company is conducting research and development
activities to develop new multi-layer data storage media and currently has no
operating revenues. It is the intent of this company to enter into strategic
alliances to license its technology to its strategic partners.
Research and Development -- Costs will be expensed as incurred until
technological feasibility has been obtained, product design has been completed
and a working model has been developed and tested.
Foreign Currency Translation -- The financial statements of the
subsidiaries are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS
52"). The currency of the operations of the Company's subsidiary in Israel is
conducted in U.S. dollars since most of its financing and other activities are
in dollars. Transactions and balances originally denominated in dollars are
presented in their original amounts. Balances in non-dollar currencies are
translated into dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar transactions
reflected in the statements of operations, the exchange rates at the
transaction dates are used. Depreciation expenses are based on historical
exchange rates. The resulting translation gains or losses are charged to
operations. The Company's subsidiary in Russia maintains accounting records in
Russian ruble. The ruble is considered the subsidiary's functional currency.
Transactions and balances not already measured in dollars have been re-measured
into dollars as applied to entities in highly inflationary economies. Revenues,
costs, capital and non-monetary assets and liabilities are translated at
historical exchange rates prevailing on the transaction date. Monetary assets
and liabilities are translated at the exchange rates prevailing on the balance
sheet date. Translation gains and losses from remeasurement of monetary assets
and liabilities that are not denominated in U.S. dollars are not material to
the consolidated operations of the Company.
Stock-Based Compensation -- Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"), establishes a
fair value method of accounting for stock-based compensation plans and for
transactions in which a company acquires goods or services from non-employees
in exchange for equity instruments. SFAS 123 also allows companies to account
for stock-based employee compensation in accordance with Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," or
SFAS 123. The Company elected to follow APB 25 which measures compensation
expense for employee stock options as the excess, if any, of the fair market
price of the Company's stock at the measurement date over the amount an
employee must pay to acquire stock.
Net Loss Per Share -- Basic loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of stock
options, warrants and contingent shares, based on the treasury method of
computing such effects, and are not included in the calculation of loss per
share, as their effect was anti-dilutive. All per share information has been
adjusted to reflect the three-for-one stock split declared on December 16,
1999.
F-18
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 1. Description of Business and Summary of Significant Accounting Policies
-- (Continued)
Accounting Estimates -- The Company's financial statements are prepared in
conformity with generally accepted accounting principles of the United States,
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Reclassifications -- Certain reclassifications have been made to the prior
period's financial statement amounts to conform to the current period's
presentation.
Interim Statements -- The accompanying consolidated statements of
operations and cash flows for the six months ended June 30, 1999 are unaudited
and include, in the opinion of management, all normal recurring adjustments
necessary to present fairly the related statements of operations and cash flows
for the six months ended June 30, 1999.
Recent Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
The statement establishes accounting and reporting standards requiring that
every derivative instrument (including some types of derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133, as amended by SFAS No. 137 defining
SFAS No. 133's effective date, is effective for fiscal years beginning after
June 15, 2000, and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997.
In March 2000, the Financial Accounting Standards Board released
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). FIN 44 addresses certain practice issues related to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). FIN 44 applies only to companies that have chosen not to
adopt SFAS 123, Accounting for Stock-Based Compensation, for transactions with
employees. Among other issues, FIN 44 clarifies (a) the definition of an
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occur after either December
15, 1998 or January 12, 2000. To the extent that FIN 44 covers events occurring
during the periods after December 15, 1998 or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying FIN 44 are recognized
on a prospective basis from July 1, 2000.
The Company does not expect the adoption of either of the above accounting
pronouncements to have a material effect on its financial position or results
of operations.
Effective January 1, 1999, the Company adopted Statement of Position 98-5
("SOP 98-5"), Reporting on the Costs of Start-Up Activities, issued by the
American Institute of Certified Public Accountants. SOP 98-5 establishes
guidance on the financial reporting of start-up costs and organization costs.
The Statement requires that costs of start-up activities and organization costs
be expenses as incurred. The effect of adopting this standard was not material
to the Company.
F-19
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 2. Development Stage Operations
The Company has been in the development stage since its inception. It has
had no operating revenues to date, has accumulated losses of $20,690,294, and
will require additional working capital to complete its business development
activities and generate revenues adequate to cover operating and further
development expenses.
Subsequent to June 30, 2000, the Company raised $11,620,409, net of
commissions and fees of $780,017, through private placements, obtained a $6
million line of credit from a related party (of which the Company has utilized
$1,000,000 of this credit facility) and converted $2,368,119 of long-term
convertible notes payable into equity. Additionally, the Company converted
short-term shareholder promissory notes aggregating $1,402,163 into equity.
Based on the effects of these transactions and agreements and the Company's
projected cash requirements, the Company has sufficient working capital to
sustain operations through June 30, 2001 (see Note 10).
The Company believes it can raise additional working capital through
future sales of its common stock or subordinated debt in private placement
transactions. However, there can be no assurance that the Company will be
successful in its efforts to raise these funds.
NOTE 3. Furniture and Equipment
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
------------ -------------- -------------
<S> <C> <C> <C>
Furniture and equipment ................ $ 398,228 $ 320,463 $ 306,156
Less: accumulated depreciation ......... 109,386 79,363 38,925
--------- --------- ---------
Furniture and equipment, net ........... $ 288,842 $ 241,100 $ 267,231
========= ========= =========
</TABLE>
NOTE 4. Convertible Notes Payable
Convertible notes payable (which include accrued interest) consist of the
following (See Note 10):
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Convertible note payable, interest at LIBOR + 3%,
due on demand (a) .............................. $ 674,481 $ 650,577 $ 377,624
Convertible note payable, interest at 8%, due
October 31, 2001 (b) ........................... 533,425 505,480 --
Convertible note payable, interest at 8%, due
October 31, 2001 (c) ........................... 1,664,175 1,600,000 --
Convertible note payable, interest at 10%, due
September 24, 2001 (d) ......................... 4,104,110 -- --
----------- ----------- ---------
6,976,191 2,756,057 377,624
Less: amount representing interest on detachable
stock purchase warrants (Note 7) ............... 3,187,396 -- --
----------- ----------- ---------
3,788,795 2,756,057 377,624
Less: current maturities ........................ 674,481 650,577 377,624
----------- ----------- ---------
$ 3,114,314 $ 2,105,480 $ --
=========== =========== =========
</TABLE>
F-20
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 4. Convertible Notes Payable -- (Continued)
The noncurrent portion of convertible notes payable matures during the
year ended December 31, 2001.
(a) The Company entered into a short-term unsecured loan agreement with
Formula Ventures, Ltd. in 1997 for $270,000. The agreement was amended on
October 15, 1998, increasing the facility to $600,000. The loan is payable upon
demand and bears interest at LIBOR +3% (9.649% at June 30, 2000). The loan was
converted on September 12, 2000, into 380,000 common shares of the Company.
(b) On November 11, 1999, the Company issued $500,000 of convertible
subordinated debt to Wilbro Nominee Limited. The note is due October 31, 2001
with interest at the rate of 8% per annum. The note is convertible into common
stock at a price equal to 80% of the average posted price for the 20 days
preceding the conversion date, beginning May 11, 2000. The market value for the
Company's stock on November 11, 1999 was $7.67. The excess of the fair value of
the conversion formula over the fair value of the stock was deemed to be a
beneficial conversion feature valued at $125,000, which was recorded as an
increase to additional paid-in capital and interest expense.
(c) On December 24, 1999, the Company issued $1,600,000 of convertible
subordinated debt to Winnburn Advisory. The note is due October 31, 2001 with
interest at the rate of 8% per annum. The note could be converted immediately
into common stock at the greater of $16.67 per common share or the average
market price for the Company's common stock for the 20 days preceding the
conversion date. During August 2000, the conversion price was amended to
$10.1531 per common share and was converted into 166,097 common shares of the
Company.
(d) On December 1, 1999 ("Commencement Date"), we entered into a Placement
Agency Agreement and Warrant Agreement with Sands Brothers & Co., Ltd. (the
"Agency Agreement" and "Warrant Agreement", respectively) which obligates Sands
Brothers & Co. Ltd. ("Sands Brothers") to raise through the placement of our
securities, on a best efforts basis, a minimum of $4.0 million and, as amended
on March 23, 2000, a maximum of $120.0 million for us. On the Commencement
Date, it was anticipated that Sands Brothers would raise $7.5 million within 90
days subsequent to the Commencment Date. In the event that the $7.5 million was
not raised within 150 days from the Commencement Date the agreement will be
subject to renegotiation by both parties. On March 24, 2000, C3D issued a 10%
subordinated convertible debenture for the principal amount of $4,000,000 to
Sands Brothers Venture Capital Associates LLC ("Sands Brothers VC"), an
affiliate of Sands Brothers. The subordinate convertible debenture can be
converted at any time into shares of common stock of the Company at a
conversion price of $17.65 and expires on September 24, 2001. Sands Brothers VC
has the right to demand repayment of all or any portion of the principal amount
of the convertible debenture and interest outstanding before the maturity date
in the event that C3D receives more than $25,000,000 in gross financing through
the sale of debt and/or equity securities or a change of control of the Company
occurs. C3D granted the subordinated convertible debenture holder certain
registration rights with respect to the underlying common stock.
NOTE 5. Income Taxes
At June 30, 2000, the Company has net operating loss carry forwards assets
of approximately $10,000,000 and $2,000,000 available to offset future US
source income and Israeli source income, respectively, which begin to expire in
2018. The Company's effective tax rate was estimated at 34% and 36% for US
source income and Israeli source income, respectively. A 100% valuation
allowance has been recorded against the deferred tax asset, primarily resulting
from net operating loss carry forwards, as management has yet to conclude that
realization of such assets is more likely than not.
The Company recognized current tax expense of $11,521 for the six months
ended June 30, 2000 and $63,588, $3,462 and $0 for the years ended December 31,
1999, 1998 and for the period from September 25, 1997 through December 31,
1997, respectively. Tax expense for all periods presented represent Russian and
Israeli tax legislation requiring taxes to be provided for on cash receipts.
F-21
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 6. Related Party Transactions (See Note 10)
The Company retained all key employees under informal agreements during
the six months ended June 30, 2000 and the years ended December 31, 1999 and
1998. These agreements may be cancelled at any time. The expense of these
agreements totaled $315,000 for the six months ended June 30, 2000 and $437,500
and $400,000 for the years ended December 31, 1999 and 1998, respectively. As
of June 30, 2000, December 31, 1999 and 1998, due to related parties included
$283,000, $190,000, and $400,000, respectively, of unpaid expenses under those
agreements.
The Company assumed amounts due to a related party for $164,385 at the
time of the reverse acquisition on October 1, 1999 (see Note 1), which amount
was outstanding at June 30, 2000 and December 31, 1999. There is no maturity
date or interest bearing on this debt.
The Company borrowed $1.3 million from an existing shareholder, consisting
of a $300,000 promissory note issued on October 29, 1999 and a $1 million
promissory note issued on November 18, 1999. Both notes are unsecured, bear
interest at 10% per annum, and mature on the earlier date of July 31, 2000 or
upon consummation of various levels of financing transactions. Interest expense
amounted to approximately $65,000 and $17,000 during the six months ended June
30, 2000 and the year ended December 31, 1999, respectively. On August 23,
2000, both promissory notes were converted into a total of 138,102 common
shares of the Company.
Subsequent to June 30, 2000, the Company entered into a credit agreement
with Constellation Tech that provides for advances up to a maximum of
$6,000,000 (Note 10). The Company has utilized $1,000,000 of this credit
facility.
NOTE 7. Stockholders' Deficit (See Note 10)
For accounting purposes, on December 27, 1998, stockholders of
Constellation Tech converted approximately $4,888,537 of stockholder advances
into 3,749,400 shares of Constellation Tech's common stock. Additionally, for
accounting purposes, Constellation Tech was recapitalized on December 27, 1998
through the issuance of an additional 25,464,000 shares of common stock to
existing shareholders of Constellation Tech. For accounting purposes, after the
recapitalization, together with the issuance of 36,000 shares of common stock
for debt settlement on April 1, 1999 the number of issued shares of
Constellation Tech's common stock amounted to 29,250,000.
On October 1, 1999, C3D completed an asset purchase agreement and acquired
substantially all the operations of Constellation Tech for total consideration
of 29,250,000 shares of the Company's $.001 par value common stock, and the
assumption of substantially all liabilities and obligations of Constellation
Tech. The asset purchase agreement also provided for the cancellation of
2,925,000 shares of treasury stock of the Company.
During the six months ended June 30, 2000, the Company has issued a total
of 10,500,000 shares of common stock to Constellation 3D Trust LLC, a
wholly-owned subsidiary of the Company. Constellation 3D Trust LLC intends to
use the shares to raise debt or equity capital and contribute the proceeds
thereof to the Company. For the purposes of the Company's consolidated
financial statements, the issuance of the 10,500,000 shares of common stock are
not considered to be issued or outstanding because the common stock has
remained under the control of the Company and will be cancelled if no financing
transaction is completed. On September 15, 2000, 10,000,000 of the shares of
common stock were cancelled.
On March 24, 2000, C3D issued a 10% subordinated convertible debenture for
the principal amount of $4,000,000 with detachable warrants to Sands Brothers
VC. Proceeds from the subordinated convertible debenture issued with the
detachable stock purchase warrants are allocated between the debenture and the
warrants based on their relative fair values as required by Accounting
Principles Board Opinion No. 14. The
F-22
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 7. Stockholders' Deficit (See Note 10) -- (Continued)
value ascribed to the detachable warrants for accounting purposes was
$3,880,000 based on the proceeds of the subordinated convertible debenture to
the Company. The $3,880,000 value was recorded as a debt discount and will be
amortized as a component of interest expense over the term of the related debt.
This amount is presented as an addition to paid-in capital of stockholders'
deficit and as an offset to the related liability in the accompanying June 30,
2000 consolidated balance sheet. The balance was deemed to be a beneficial
conversion feature valued at $120,000, which was recorded as interest expense
and an increase to additional paid-in capital during the six months ended June
30, 2000. The subordinated convertible debenture can be converted at any time
into shares of common stock of the Company at a conversion price of $17.65 and
expires on September 24, 2001. The market value for the Company's stock on
March 24, 2000 was $46.50.
Upon closing of the $4,000,000 subordinated convertible debenture to Sands
Brothers VC on March 24, 2000, and pursuant to the terms of the agency
agreement originally signed on December 1, 1999, by and between the Company and
Sands Brothers, the Company issued to Sands Brothers detachable warrants to
purchase 1,050,000 shares of common stock at an exercise price of $3.67 per
share and warrants to purchase 2,400,000 shares of common stock at an exercise
price of $15.13 per share until December 1, 2004. C3D granted the warrant
holder certain registration rights with respect to the underlying common stock
and the option to exercise the stock warrants in lieu of any cash payment in
exchange for the number of shares of common stock that amount to the difference
between the market price and the exercise price of the stock warrants.
On June 28, 2000, the Company entered into an agreement to amend the
Agency Agreement and Warrant Agreement pursuant to which, effective July 10,
2000, the retention of Sands Brothers under the Agency Agreement shall be one
of a non-exclusive basis and Sands Brothers shall not be entitled to any fees
or stock warrants with respect to financing sources not brought by Sands
Brothers.
On August 3, 2000, the Company entered into another agreement to amend the
Agency Agreement, the Warrant Agreement and Warrant Certificate No. SB-2,
pursuant to which Sands Brothers would receive, in connection with financing by
any party introduced directly or indirectly by Sands Brothers and which is
consummated by no later than November 1, 2000 (but with respect to one
particular investor only, by August 11, 2000), 300,000 warrants for each $1
million of financing on the first $25 million of financing and 150,000 warrants
for each $1 million of financing on a further $50 million of financing, at an
exercise price of $10.34 per share. The exercise price is reduced to $8.25 per
share in the event that at least $75 million of financing is available from
financing sources having good and immediately available funds for the Company.
The Company intends to renegotiate the Agency Agreement and related agreements
with Sands Brothers.
Stock Options
On March 8, 1999, certain board members were granted options to purchase
up to 525,000 shares of the Company's common stock at $1.33 per share. These
options vested immediately, and expire in June 2005. At June 30, 2000, these
525,000 options remain outstanding. No expense was recognized upon granting of
the options as the exercise price was equal to the estimated market value, as
evidenced by the sale of 1,359,765 shares of common stock to unrelated third
parties completed on March 15, 1999 but not issued until May 15, 1999.
On December 27, 1999, the Company adopted the 1999 stock option plan (the
"Plan"). The Plan allows the Company to grant both qualified and nonqualified
stock options at prices not less than fair market value at date of grant to
officers, key employees, directors or anyone who provides services to the
Company. A maximum of 4,617,540 shares was approved to be issued under the
Plan. As at June 30, 2000 there were 3,871,550 options under this Plan
outstanding.
F-23
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 7. Stockholders' Deficit (See Note 10) -- (Continued)
Options granted under the Plan expire not more than ten years from the
date of grant. Generally, options vest in five years. Except as described
below, all stock options have been granted at exercise prices approximating the
market value on the date of the grant.
On May 11, 2000 the Company granted options to a non-employee consultant
who provided business development services to purchase 450,000 shares of the
Company's common stock at an exercise price of $5.00 per share. The option to
purchase the shares vested on June 30, 2000 and will expire in May 2005. In
connection with the issuance, the Company recorded a non-cash compensation
charge to operations of $4,293,000, representing the fair value of the
issuance, calculated using the Black-Scholes option-pricing model. This amount
is included in marketing expense for the six months ended June 30, 2000.
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss as if compensation cost of the Company's stock option plan
had been determined in accordance with the fair value based method prescribed
in SFAS No. 123. No options were granted prior to 1999. The weighted average
fair value of options granted during the six months ended June 30, 2000 and the
year ended December 31, 1999 were $1.29 and $4.73, respectively. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during the six months ended June 30, 2000 and the
year ended December 31, 1999: no dividend yield for any period; expected lives
of 1 to 5 years for the six months ended June 30, 2000 and the year ended
December 31,1999; expected volatility of 80% during the six months ended June
30, 2000 and the year ended December 31,1999; weighted average risk-free
interest rates of 5.05% for the six months ended June 30, 2000 and 6.73% for
the year ended December 31,1999.
Under the accounting provisions of SFAS No. 123 for options to employees
and directors, the Company's net loss and net loss per share would have been
adjusted to the pro forma amounts indicated below. There is no pro forma effect
on net loss per share for 1998 and for the period from September 25, 1997
(inception) to December 31, 1997.
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
------------------ ------------------
Pro forma net loss .......... $ (28,331,994) $ (5,547,700)
Pro forma net loss per share:
Basic and Diluted ........... $ (0.69) $ (0.17)
A summary of the status of the Company's stock option plan as of June 30,
2000 and changes during the period from September 25, 1997 (inception) through
June 30, 2000 is presented below:
<TABLE>
<CAPTION>
Weighted
Number of average
Shares exercise price
----------- ---------------
<S> <C> <C>
Options outstanding at September 25, 1997 (inception) ......... -- --
Options granted in 1999 ....................................... 525,000 $ 1.33
Options outstanding at December 31, 1999 ...................... 525,000 $ 1.33
Options granted during the six months ended June 30, 2000 4,321,550 $ 10.10
Options outstanding at June 30, 2000 .......................... 4,846,550 $ 9.15
Options exercisable at June 30, 2000 .......................... 975,000 $ 3.02
</TABLE>
F-24
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 7. Stockholders' Deficit (See Note 10) -- (Continued)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable at Average
Range of at June 30, Contractual Exercise at June 30, Exercise
Exercise Price 2000 Life Price 2000 Price
---------------- ------------- ------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.33 525,000 4.97 $ 1.33 525,000 $ 1.33
$ 5.00 450,000 4.88 $ 5.00 450,000 $ 5.00
$10.69 3,871,550 4.88 $10.69
-------------- --------- ---- ------ ------- ------
$1.33 - $10.69 4,846,550 $ 9.15 975,000 $ 3.02
-------------- --------- ------ ------- ------
</TABLE>
Warrants
On March 24, 2000, upon closing of the $4,000,000 subordinate convertible
debenture to Sands Brothers VC and pursuant to the terms of the agency
agreement originally signed on December 1, 1999, by and between the Company and
Sands Brothers, the Company issued to Sands Brothers detachable warrants to
purchase 1,050,000 shares of common stock at an exercise price of $3.67 per
share and warrants to purchase 2,400,000 shares of common stock at an exercise
price of $15.13 per share until December 1, 2004.
The Company estimates the fair value of each warrant at the grant date by
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants during the six months ended June 30, 2000:
no dividend yield; expected lives of 4.7 years; expected volatility of 45.8%;
weighted average risk-free interest rate of 6.59%.
The following table summarizes information about warrants outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Fair Market
Exercise Value on
Grant Date Shares Price Expiration Date Grant Date
------------------------ ----------- ---------- ------------------ --------------
<S> <C> <C> <C> <C>
March 24, 2000 ......... 1,050,000 $ 3.67 December 1, 2004 $45,975,395
March 24, 2000 ......... 2,400,000 $ 15.13 December 1, 2004 $86,382,718
--------- ------- ------------------ -----------
</TABLE>
NOTE 8. Commitments -- Operating leases
The Company has entered into operating lease agreements for buildings used
for office space and research activities. The leases expire on various dates
through 2001. Future minimum lease payments approximate $83,000 in the latter
half of 2000 and $20,000 in 2001. Rent expense was approximately $142,000 and
$66,000 for the six months ended June 30, 2000 and 1999, respectively, and
$160,000 and $116,800 for the years ended December 31, 1999 and 1998,
respectively.
NOTE 9. Legal Proceedings
On June 9, 2000, Challis International Limited ("Challis") commenced a
lawsuit in the Supreme Court of the State of New York, County of New York,
against Constellation Tech and C3D. The Complaint alleges that Challis entered
into several contracts with Constellation Tech or its predecessor-in-interest
pursuant to which Constellation Tech agreed to provide Challis with 11.946% of
the shares it would receive in C3D. Although the Company is not a party to any
of the contracts upon which Challis bases its claims, Challis seeks to hold
F-25
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 9. Legal Proceedings -- (Continued)
C3D liable based on allegations that C3D is the alter-ego of Constellation Tech
and that an officer of the Company signed an appendix to one of the contracts
between Challis and Constellation Tech. Challis alleges that it is entitled to
3,494,205 shares of C3D. The complaint seeks an order directing the defendants
to issue proper certificates to Challis for 3,494,205 shares of C3D or, if
specific performance is not granted, the fair market value of the shares, plus
any incidental damages. The Company believes that the outcome will not have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
NOTE 10. Subsequent Events
On August 31, 2000, the Company sold 197,026 shares of common stock for an
aggregate of $2,000,426 to Koor Underwriters ("Koor"). In connection with this
sale, the Company issued the following warrants: (1) five-year warrants to
purchase 78,813 shares of common stock at the initial exercise price of
$14.6656 per share, (2) warrants to purchase a number of shares of common stock
pursuant to a certain formula (as defined in the agreement), and (3) one-year
warrants to purchase 98,513 shares of common stock at the initial exercise
price of $10.15313 per share and additional warrants (as defined in the
agreement). In connection with this sale, the Company granted Koor certain
registration rights with respect to 197,026 shares of the common stock and the
shares to be issued upon the exercise of the above described warrants.
On August 23, 2000, the Company sold for an aggregate of $5,000,000,
492,459 shares of common stock to Halifax Fund, L.P.("Halifax"). In connection
with this sale, the Company issued the following warrants to Halifax: (1)
five-year warrants to purchase 196,984 shares of common stock at the initial
exercise price of $14.6656 per share, (2) warrants to purchase a number of
shares of common stock pursuant to a certain formula (as defined in the
agreement), and (3) one-year warrants to purchase 246,229 shares of common
stock at the initial exercise price of $10.15313 per share and additional
warrants (as defined in the agreement). In connection with this sale, the
Company granted Halifax certain registration rights with respect to 492,459
shares of common stock and the shares to be issued upon the exercise of the
above described warrants.
On September 19, 2000, the Company amended and supplemented the investment
agreement with Halifax and sold for an aggregate of $5,000,000 an additional
492,459 shares of common stock. In connection with this additional investment,
the Company amended the investment agreement for the following additional
warrants to Halifax: (1) five-year warrants to purchase 196,984 shares of
common stock at the initial exercise price of $14.6656 per share, (2) warrants
to purchase a number of shares of common stock pursuant to a certain formula
(as defined in the agreement), and (3) one-year warrants to purchase 246,229
shares of common stock at the initial exercise price of $10.15313 per share and
additional warrants (as defined in the agreement). In connection with this
sale, the Company granted Halifax certain registration rights with respect to
492,459 shares of common stock and the shares to be issued upon the exercise of
the above described warrants.
In connection with the sale of the foregoing securities, the Company paid
$780,017 and issued warrants to purchase 895,539 of common stock at the
exercise price of $14.6656 per share as commissions to brokers.
On August 17, 2000, the Company sold for an aggregate of $250,000, 25,000
shares of common stock to TCO Investments ("TCO"). In connection with this
sale, on August 18, 2000, the Company issued five-year warrants to purchase
15,000 and 10,000 shares of common stock to Guldborg International and Farpell
Inc., respectively, at an exercise price equal to the market price of the
common stock on the date of issuance. In connection with this sale, the Company
granted TCO, Guldborg International and Farpell Inc. certain registration
rights with respect to 25,000 shares of common stock and the shares to be
issued upon the exercise of the above described warrants.
The Company entered into a credit line agreement on August 23, 2000 with
Constellation Tech ("lender"), which provides for advances up to $1,000,000
within 6 consecutive periods of 30 days each, up to
F-26
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 10. Subsequent Events -- (Continued)
maximum borrowings of $6,000,000. All advances are payable within one year from
the date of issuance. The interest rate for each advance will be the interest
rate of three-month LIBOR plus 3%. Any outstanding balances due to the lender
may be converted into equity at a price per share of 90% of the average closing
price of the Company's common stock for the 12 trading days prior to August 23,
2000. In connection with this credit line, the lender will receive a three-year
warrant to purchase 20,000 shares of common stock upon signing the agreement
and a three-year warrant to purchase 10,000 shares of common stock upon each
advance made by the lender at a purchase price equal to 100% of the closing
price of the Company's common stock on August 23, 2000. The fair value ascribed
to the 30,000 warrants was approximately $117,000 based on the Black-Scholes
option-pricing model; such amount will be recorded as deferred financing cost
and amortized to interest expense over the term of the credit line. Upon the
last advance, the lender will have the right to purchase additional shares of
common stock for a price not less than $2,000,000. As of September 22, the
Company has utilized $1,000,000 of this credit facility. Constellation Tech is
a related party by virtue of it owning the majority of the shares of the
Company's common stock as well as having common directors and officers.
On August 23, 2000, an aggregate principal amount of $1,600,000 plus
interest of $86,399 of 8% convertible notes was converted into 166,097 shares
of common stock at a conversion rate of $10.1531 per share. The noteholder also
received one year warrants to purchase 83,048 shares of common stock and five
year warrants to purchase 66,439 shares of common stock.
On August 23, 2000, a shareholder loan in the principal amount of
$1,300,000 plus interest of $102,163 was converted into 138,102 shares of
common stock at $10.1531 per share. The shareholder also received one year
warrants to purchase 69,051 shares of common stock and five year warrants to
purchase 55,241 shares of common stock.
On September 12, 2000, an aggregate principal amount of $600,000 plus
accrued interest of approximately $81,720 of convertible notes was converted
into 380,000 shares of common stock at $1.794 per share.
On September 12, 2000, the Company sold 14,774 shares of common stock for
an aggregate of $150,000. In connection with this sale, the Company issued the
following warrants: (1) five-year warrants to purchase 5,910 shares of common
stock at the initial exercise price of $14.6656 per share, (2) warrants to
purchase a number of shares of common stock pursuant to a certain formula (as
defined in the agreement), and (3) one-year warrants to purchase 7,387 shares
of common stock at the initial exercise price of $10.15313 per share and
additional warrants (as defined in the agreement) pertaining to 7,387 shares of
common stock. In connection with this sale, the Company granted the investor
certain registration rights with respect to 14,774 shares of the common stock
and the shares to be issued upon the exercise of the above described warrants.
The balance sheet amounts at June 30, 2000 would be adjusted to the pro
forma (unaudited) amounts listed below as a result of the above described
transactions:
Cash and cash equivalents ...... $ 14,388,864
Current assets ................. 14,586,133
Current liabilities ............ 2,954,842
Long term liabilities .......... 1,507,596
Stockholders' equity ........... 10,412,537
F-27
<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts related to the six months ended June 30, 1999 are
unaudited) -- (Continued)
NOTE 10. Subsequent Events -- (Continued)
On August 22, 2000, the Company issued options to purchase 390,000 shares
of common stock to Vladimir Schwartz, the Chief Technology Officer, as
compensation for services. Of the total grant 150,000 options vest immediately
and 240,000 options vest after one year from the date of the grant. The
exercise price is $11.25 per share and expires on August 22, 2004.
Additionally, the Company granted Mr. Schwartz a warrant to purchase 10,000
shares of common stock in consideration of the assignment of certain patents.
The warrant is exercisable at $11.25 per share and, vesting after one year from
the date of the grant, expires on August 22, 2004.
F-28
