UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NO. 000-24757
eMagin Corporation
(Name of Small Business Issuer in Its Charter)
Delaware 56-1764501
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2070 Route 52, Hopewell Junction, New York 12533
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(Address of Principal Executive Offices) (Zip Code)
(845) 838-7900
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.001 Par Value Per Share
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Our revenues for our most recent fiscal year were $ 2,587,599.
There are 62,996,760 shares outstanding as of March 30, 2003. The aggregate
market value of the voting stock held by non-affiliates of eMagin was
$56,393,778 as of March 30, 2004, based upon the closing sales price of the
Registrant's common stock as quoted on the AMEX of $2.07.
There were 42,695,412 shares of common stock outstanding, $.001 par value per
share, issued as of December 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the registrant's 2004 Annual Meeting of Stockholders are
incorporated herein by reference into Part III of this Annual Report on Form
10-KSB.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
INDEX
PART I
Page
Item 1. Description of Business........................................... 4
Item 2. Description of Property........................................... 21
Item 3. Legal Proceedings................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............... 22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................................22
Item 6. Management's Discussion and Analysis or Plan of Operation..........24
Item 7. Financial Statements...............................................37
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................58
Item 8A. Controls and Procedures............................................58
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act.................59
Item 10. Executive Compensation.............................................61
Item 11. Security Ownership of Certain Beneficial Owners and Management.....61
Item 12. Certain Relationships and Related Transactions.....................61
Item 13. Principal Accountant Fees and Services.............................61
PART IV
Item 14. Exhibits and Reports on Form 8-K...................................62
SIGNATURES
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this annual report, references to "eMagin Corporation," "eMagin," "Virtual
Vision," "the Company," "we," "us," and "our" refer to eMagin Corporation and
its subsidiary.
Except for the historical information contained herein, some of the statements
in this Report contain forward-looking statements that involve risks and
uncertainties. These statements are found in the sections entitled "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Risk Factors." They include statements concerning: our
business strategy; expectations of market and customer response; liquidity and
capital expenditures; future sources of revenues; expansion of our proposed
product line; and trends in industry activity generally. In some cases, you can
identify forward-looking statements by words such as "may," "will," "should,"
"expect," "plan," "could," "anticipate," "intend," "believe," "estimate,"
"predict," "potential," "goal," or "continue" or similar terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including, but not limited to, the risks
outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For
example, assumptions that could cause actual results to vary materially from
future results include, but are not limited to: our ability to successfully
develop and market our products to customers; our ability to generate customer
demand for our products in our target markets; the development of our target
markets and market opportunities; our ability to manufacture suitable products
at competitive cost; market pricing for our products and for competing products;
the extent of increasing competition; technological developments in our target
markets and the development of alternate, competing technologies in them; and
sales of shares by existing shareholders. Although we believe that the
expectations reflected in the forward looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Unless we are required to do so under US federal securities laws
or other applicable laws, we do not intend to update or revise any
forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
eMagin Corporation designs, develops, manufactures, and markets virtual
imaging products which utilize OLEDs, or organic light emitting diodes,
OLED-on-silicon microdisplays and related information technology solutions. We
integrate OLED technology with silicon chips to produce high-resolution
microdisplays smaller than one-inch diagonally which, when viewed through a
magnifier, create virtual images that appear comparable in size to that of a
computer monitor or a large-screen television. Our products enable our original
equipment manufacturer, or OEM, customers to develop and market improved or new
electronic products. We believe that virtual imaging will become an important
way for increasingly mobile people to have quick access to high resolution data,
work, and experience new more immersive forms communications and entertainment.
Our first commercial product, the SVGA+ (Super Video Graphics Array plus 52
added columns of data) OLED microdisplay was first offered for sampling in 2001,
and our first SVGA-3D (Super Video Graphics Array plus built-in stereovision
capability) OLED microdisplay was first shipped in early 2002. We have now
accepted purchase agreements for larger quantities of our commercial
microdisplay products and virtual imaging subsystems which combine displays with
lenses. These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. We market our products in North American, Europe, and
Asia.
Our OLED-on-silicon microdisplays offer a number of advantages over current
liquid crystal microdisplays, including increased brightness, lower power
requirements, less weight and wider viewing angles. Using our active matrix OLED
technology, many computer and video electronic system functions can be built
directly into the OLED-on-silicon microdisplay, resulting in compact systems
with expected lower overall system costs relative to alternate microdisplay
technologies. We have developed our own technology to create high performance
OLED-on-silicon microdisplays and related optical systems and we have licensed
certain fundamental OLED and display technology from Eastman Kodak. The
worldwide market for OLED displays amounted to $91 million in 2002, $249 million
in 2003, and will grow to $3.1 billion in 2009, for a compound annual growth
rate of 56 percent from 2003 to 2009, according to iSuppli/Stanford Resources
research as of March 2004.
As the first to exploit OLED technology for microdisplays, and with the
support of our partners and the development of our intellectual property, we
believe that we enjoy a significant advantage in the commercialization of this
display technology for virtual imaging. We are the only company to announce,
publicly show and sell full-color active matrix OLED-on-silicon microdisplays.
Our wholly owned subsidiary, Virtual Vision, Inc., provides added value
services to our customers by providing custom engineering support for virtual
imaging subsystem design and prototyping, as well as by creating standardized
optical and electronics interfaces for our displays that accelerate the time to
market for products offered by our new potential customers.
Our website is located at www.emagin.com. We make available on our website,
free of charge, our annual report on Form 10KSB, our proxy statement, our
quarterly reports on Form 10QSB, our current reports on Form 8K, amendments to
reports filed under the Securities and Exchange Act, earnings press releases,
and other business-related press releases. We also intend to post on our website
the charters of our Audit, Compensation, and Governance and Nominating
committees, our Codes of Ethics and any amendments of or waiver to those codes
of ethics, and other corporate governance materials recommended by the
Securities and Exchange Commission and the American Stock Exchange.
Industry Overview
The overall flat panel display industry is predicted to grow to over $69
billion in 2005, according to market research by DisplaySearch. Within the flat
panel industry there are various sizes and applications of flat panel displays,
ranging from wall size signage to calculator and viewfinder displays. Displays
are sold as independent products
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(such as flat TVs) or as components of other systems (such as laptop computers).
Our products target one segment of the flat panel industry which is known as
near-to-the-eye or near-eye microdisplays because they are viewed through a lens
rather than directly, such as desktop computer screens which are know as direct
view displays.
Near-eye virtual imaging using microdisplays are used in small optically
magnified devices such as video headsets, camcorders, viewfinders and other
portable devices. Microdisplays are typically of such high resolution that they
are only practically viewed with magnifying optics. Although the displays are
typically physically smaller than a postage stamp, they can provide a magnified
viewing area similar to that of a full size computer screen. For example, when
magnified through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19 to 21-inch diagonal computer screen at about 2 feet from the
viewer or a 60-inch TV screen at about 6 feet. One version of our display and
optic recreates the virtual imaging viewing and sound experience of sitting in
the middle seat of a typical movie theater.
The microdisplay market, according to McLaughlin Consulting Group in a
report issued in November 2002, is expected to grow on a unit basis at 20% per
year, from a base of less than $1 billion in 2002 to more than $1.4 billion by
2006. Another leading industry market research organization, DisplaySearch,
projects that the overall microdisplay market is expected to grow to a $3
billion per year rate by the end of 2005.
We believe that the most significant driver of the near-eye virtual imaging
microdisplay market is growing consumer demand for mobile access to larger
volumes of information and entertainment in smaller packages. This desire for
mobility has resulted in the development of near-eye microdisplay products in
two general categories: (i) an established market for electronic viewers
incorporated in products such as viewfinders for digital cameras and video
cameras which may potentially also be developed as personal viewers for cell
phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices such as notebook and sub-notebook
computers, portable DVD systems, electronic games, and other entertainment, and
wearable computers.
Until now, near-eye virtual imaging microdisplay technologies have not
simultaneously met all of the requirements for high resolution, full color, low
power consumption, brightness, lifetime, size and cost which are required for
successful commercialization in OEM consumer products. We believe that our new
OLED-on-silicon microdisplay product line meets these requirements better than
alternative products and will help to enable virtual imaging to emerge as an
important display industry segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
There are two basic classes of organic light emitting diode, or OLED,
technology, dubbed single molecule or small molecule (monomer) and polymer. Our
microdisplays are currently based upon active matrix molecular OLED technology,
which we call OLED-on-silicon because we build the displays directly on silicon
chips. Our OLED-on-silicon technology uniquely permits millions of individual
low-voltage light sources to be built on low-cost, silicon computer chips to
produce single color, white, or full-color display arrays. OLED-on-silicon
microdisplays offer a number of advantages over current liquid crystal
microdisplays, including increased brightness, lower power requirements, less
weight and wider viewing angles. Using our OLED technology, many computer and
video electronic system functions can be built directly into the silicon chip,
under the OLED film, resulting in very compact, integrated systems with lowered
overall system costs relative to alternative technologies.
We have developed our own proprietary and patented technology to create
high performance OLED-on-silicon microdisplays and related optical systems and
we license fundamental OLED technology from Eastman Kodak. (See "Intellectual
Property" and "Strategic Relationships"). We expect that the integration of our
OLED-on-silicon microdisplays into mobile electronic products will result in
lower overall system costs to our OEM customers.
We believe that our OLED-on-silicon microdisplays will initiate a new
generation of virtual imaging products that will have a profound impact on many
industries. Headsets providing virtual screens surrounding the user in a sphere
of data become a practical reality with our displays and a low cost head
tracker. Because our microdisplays generate and emit light, they have a wider
viewing angle than competing liquid crystal microdisplays, and because they have
the same high brightness at all forward viewing angles, our microdisplays permit
a large field-of-view and superior optical image.
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The wider viewing angle of our display results in the following superior optical
characteristics:
o the user does not need to as accurately position the head-wearable
display to the eye;
o the image will change minimally with eye movement and appear more
natural; and
o the display can be placed further from the eye and not cut off part of
the image.
In addition, our OLED-on-silicon microdisplays offer faster response times
and use much less power than competitive liquid crystal microdisplay systems.
Our subsystem-level power consumption is so low that two SVGA, full color, full
speed motion video computer displays can easily be run in stereovision off the
power from a single USB port on a portable computer. Battery life is extended or
weight is greatly reduced in systems using our products.
Our OLED microdisplay stores all the color and luminance value information
at each of the more than 1.5 million picture elements, or pixels, between
refresh cycles in the display array, eliminating the flicker or color breakup
seen by most other high-resolution microdisplay technologies. Even power
efficient frame rates as low as 30 Hz can usually be used effectively. Power
consumption at the system level is expected to be the lowest of any full-color,
full-video SVGA resolution range, large view microdisplay on the market. The
OLED's ability to emit light at wide angles allows customers to create large
field of view (approx. 40 degrees), wide image capture range images from very
compact, low-cost, one-piece optical systems. The display contains the majority
of the electronics required for connection to the RGB (red, green, blue signal)
port of a portable computer imbedded in its silicon chip backplane, thereby
eliminating many other components required by other display technologies such as
D-A converters, application-specific integrated circuits (ASICs), light sources,
multiple optical elements, and other components. We believe that these features
will enable our new class of microdisplay to potentially be the most compact,
highest image quality, and lowest cost solution for high resolution near-eye
applications, once they are in full production.
We have commercialized two OLED microdisplay products, our SVGA+ resolution
microdisplay, which contains 1.53 million picture elements, and our
stereovision-capable SVGA-3D microdisplay, which contains 1.44 million picture
elements. We are currently developing a military and industrial oriented
ultra-high-luminance monochrome SXGA integrated circuit, which contains
1280x1024 picture elements, that is now due for completion in mid-2004. We sell
our OLED-on-silicon microdisplays for use as components by customers who prefer
to design and build their own lenses or coupled with our own optics. We also
plan to offer OLED processing on our customers' integrated circuits to some OEMs
who design their own integrated circuits. We provide Developer Kits, which
include a microdisplay and associated electronics to help OEMs evaluate our
microdisplay products and to assist their efforts to build and test new products
incorporating our microdisplays.
Our Product Lines
We offer our products to OEMs and other large volume buyers as both
separate components and integrated bundles in a three-tiered platform. We
believe that our strategy of offering our products both as separate components
and as integrated bundles that include microdisplays and lenses will allow us to
address the needs of the largest number of potential customers.
(1) OLED-on-silicon microdisplays for integration into near-eye virtual
imaging OEM products for consumer, industrial, and military markets;
(2) Microviewer(TM) near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with compact lenses and electronic interfaces for
integration into OEM products for consumer, industrial, and military markets. We
have shipped customized microviewer modules to several customers, some of which
have incorporated our products into their own commercially available products;
(3) Head-wearable near-eye virtual imaging display systems that will
incorporate our Microviewers(TM) for consumer and industrial markets. These
products have been prototyped and are planned.
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We also offer engineering support and a variety of support products,
including developer kits and PC interface kits, to enable customers to quickly
integrate our products into their own product development programs.
Our Products
(1) OLED Microdisplay Products
We serve as a component manufacturer by supplying our OLED-on-silicon
microdisplays for those customers who have their own lenses or integrated
circuits. Our first commercial microdisplay products are based on our "SVGA
series" OLED microdisplays. We expect to offer our SXGA OLED microdisplay during
2004. The table below provides a partial listing of the display products, or in
the late stages of development.
OLED Microdisplays:
Microdisplay Description Resolution Color Size
Product Numbers (pixels) (diagonal)
EMA-100080 SVGA+ OLED microdisplay 852x3x600 color 0.62 inch
EMA-100100 SVGA+ OLED microdisplay 852x3x600 white 0.62 inch
EMA-100116 SVGA+ OLED microdisplay 852x3x600 yellow 0.62 inch
EMA-100110 SVGA+ OLED microdisplay 852x3x600 green 0.62 inch
EMA-100052 SVGA 3D OLED microdisplay 800x3x600 color 0.59 inch
0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns
of data) for Consumer OEMs. This display has a resolution of 852 x 3 x 600
pixels, and was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display. The design permits users to run either (1) standard SVGA
(800 x 600 pixels) to interface to the analog output of many portable computers
or (2) 852 x 480, using all the data available from a DVD player in a 16:9 wide
screen entertainment format. The SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable electronics applications. The display also has an internal
NTSC monochrome video decoder for low power night vision systems. This product
is designed to interface with most portable personal computers.
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
priced lower than the SVGA+, so it is likely to be selected whenever the OEM
customer does not need monochrome NTSC or the extra columns of resolution.
0.98-inch Diagonal SXGA (Super Extended Video Graphics Array) for
Industrial, Medical and Military Applications. We are developing an introductory
SXGA microdisplay product as a personal computer-compatible headset display for
military, medical, high-end commercial, and industrial applications. We
anticipate that this display will become available for sampling sometime in
2004. This product will have 1280 x 1024 monochrome pixels and will be adaptable
to color VGA resolution. The display will have a capability for very high
luminance. We expect that this display will be able provide over 30,000 Cd/m2
luminance. For reference, a typical notebook computer operates at 80 Cd/m2 peak
luminance. This digital video and data interface product is being designed to
exhibit a wide dimming range and high luminance for special military
applications. Even though this SXGA is not expected to be a high production
quantity product, we anticipate that the performance features of this SXGA, such
as high-speed digital video and 256 gray levels with super high luminance
capability and a very large imaging area for a silicon chip, has the potential
to serve as a catalyst for the development of new applications.
OLED Microdisplay Kits:
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Kit Product Number Description Available colors
EMA-100119 SVGA+ Monocular Developer Kit Color, white, yellow, green
EMA-100120 SVGA+ Binocular Developer Kit Color, white, yellow, green
EMA 100125 SVGA 3D Monocular Developer Kit Color, white, yellow, green
EMA-100126 SVGA 3D Binocular Developer Kit Color, white, yellow, green
EMA-100121 HB High Bright Monocular Developer Kit Yellow
EMA-100135 SVGA Series Monocular PC Interface Kit Color, white, yellow, green
EMA-100136 SVGA Series Binocular PC Interface Kit Color, white, yellow, green
Developer Kit. The multi-functional Developer Kit provides a menu selection
of resolution, frequency, image flip, monochrome operation, gain, and offset. It
also provides NTSC RS-170 video composite input for SVGA+ (monochrome only). An
optional serial-to-I2C adapter provides direct loading and interrogation of
display registers located on the display chip.
The PC Interface Kit provides a simple RGB interface with image flipping
for SVGA+ and SVGA-3D displays, and automatic stereovision signal recognition
for SVGA-3D displays. Interface kits can be provided configured with or without
displays.
(2) Microviewer(TM) Products Incorporating Lenses
By providing an integrated solution of a complete microdisplay and lens
assembly to integrate into OEM customers' end product design, OEM customers can
avoid incurring expensive optics design and tooling costs. Different lens and
microdisplay specifications can be mixed and matched to be adapted to many end
products.
We have developed advanced lens technology for several applications and
believe we hold key patents on certain low cost, high performance lens
technology for microdisplay applications. Our lens technology permits our
OLED-on-silicon microdisplays to provide large field of view images that can be
viewed for extended periods with reduced eye-fatigue.
We intend to sell Microviewer(TM) modules to OEMs for integration with
their branded products, or incorporated into eGlass(TM) Personal Viewer(TM)
head-wearable displays to be supplied by our subsidiary, Virtual Vision, Inc.
Some of our potential customers have stated a preference for Microviewers(TM)
over microdisplays since Microviewers(TM) incorporate lenses which save OEMs a
step in their manufacturing process and can save them the long time required to
develop a high performance lens system. Custom microviewer products incorporated
into specially designed modules are currently being sold to OEMs, including Sage
Technologies and Total Fire Group.
Low cost molded plastic lenses are in development under eMagin direction to
help our commercial and consumer OEM customers obtain better quality, large area
virtual images using our displays at relatively low cost to alternate
approaches.
(3) eGlass(TM) Personal Viewer(TM) Head-Wearable Systems
Personal Viewer(TM) head-wearable systems, such as our eGlass(TM) Personal
Viewer(TM), give users the ability to work with their hands while simultaneously
viewing information or video on the display. Our head-wearable displays enable
more versatile portable computing, capable of delivering an image that appears
comparable to that of a 19-inch monitor at 22 to 24 inches from the eye using a
0.59-inch diagonal microdisplay (SVGA-3D). We believe that Personal Viewer
head-wearable displays will fill the increasing demand for instant data
accessibility in mobile workplaces. We expect to sell the head-wearable displays
primarily to OEM systems and equipment customers through direct sales and our
e-commerce website which is under development.
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Prior Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received First
Place recognition for the US Air Force with a Second Annual Dual Use Science and
Technology Achievement Award. eMagin's technology was also recognized as one of
the best dual use technologies in 2001 across all branches of the Armed
Services. The award, presented by the Deputy Under Secretary for Defense,
Charles J. Holland, recognizes the best dual use programs and honors those
responsible for developing and implementing technology beneficial to both
military and commercial sectors.
o 2001 Product of the Year
January 17, 2001. eMagin received a 2001 Product-of-the-Year Award from
Electronic Products Magazine, honoring eMagin for the development of its
first-of-class high-resolution active matrix OLED-on-silicon microdisplay, based
on significant advances in technology.
o 2001 U.S. Army Phase II Quality Award
August 21, 2001. eMagin received a 2001 US Army SBIR (Small Business
Innovation Research) Phase II Quality Award for the development of
high-resolution active matrix OLED microdisplays for incorporation into military
head-mounted displays. The annual Quality Awards Program recognizes top quality
Army Phase II projects for their technical achievement, contribution to the Army
and potential for commercial use. Selected by a distinguished panel of Army and
industry experts, eMagin's project was among only five selected to receive a
2001 U.S. Army SBIR Phase II Quality Award through the rigorous Quality Awards
competition.
o Display of the Year 2000 Gold Award
June 6, 2001. eMagin was honored by The Information Display Magazine and
Society Information Display with the Display of the Year Gold Award for its
OLED-on-Silicon microdisplay. The Display of the Year Award was established in
1995 to recognize outstanding products chosen for their innovation and potential
impact on current and future display markets. An international committee of
distinguished display technologists and leading editors in a four-month process
of nominations and voting made the selection.
Our Market Opportunity
The growth potential of our selected target market segments have been
investigated using information gathered from key industry market research firms,
including DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data
Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was
obtained using published reports and data obtained at industry symposia. We have
also relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
We believe that the consumer oriented, virtual-imaging market is
characterized by about 20 large OEMs that, collectively, dominate 90% of the
market. The non-consumer market consists of niches - industrial, medical,
military, arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within
each of these market sectors, we believe that our microdisplays, when combined
with compact optic lenses, will become a key component for a number of mobile
electronic products. We are targeting the following applications:
(1) Near-Eye Viewers for Digital Cameras, Camcorders and Hand-held Internet
and Telecommunications Appliances
We believe that our microdisplays will enhance near-eye applications in the
following groups of products:
o Digital cameras and camcorders, which typically use direct view
displays at low resolution, offer a small visual image, and are
difficult to see on sunny days. According to Display Search, 41
million digital cameras and 13 million camcorders are expected to be
sold in 2005. Some of these products may incorporate microdisplays as
high-resolution viewfinders which would permit individuals to see
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enlarged, high-resolution proofs immediately upon taking the picture,
giving them the opportunity to retake a poor shot.
o Mobile phones and other hand-held Internet and telecommunications
appliances which will enable users to access full web and fax pages,
data lists and maps in a pocket-sized device. According to the Fuji
Chimera Research Institute, an industry market research organization,
by 2005 the cellular phone and handheld portable digital assistant
markets will grow to 655 million units and 20 million units,
respectively. Some of these products may eventually incorporate our
microdisplays. In order for the high-resolution wireless
telecommunications market to develop, Generation 3 (G3) high-speed
data transmission must become widely available. The current cost and
limited availability of broadband services has impeded the development
of this market, but several telecommunication companies have prototype
programs in progress which incorporate our microdisplay products.
For each of these applications, we anticipate that our microdisplays,
combined with compact optic lenses, will offer higher resolution, lower power
and system cost and achieve larger images than are currently available in the
consumer market. As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.
(2) Head-wearable Display Platforms
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often
referred to as head-mounted displays (HMDs) or headsets. Head-wearable displays
may block out surroundings for a fully immersive experience, or be designed as
"see-through" or "see-around" to the user's surroundings. They may contain one
(monocular) or two (binocular) displays. Some of the increased current interest
is due to accelerating the timetable to adapt such systems to military
applications such as night vision and fire and rescue applications. These have
military, commercial, and consumer applications.
Military
Military demand for head-wearable displays is currently being met with
microdisplay technologies that we believe to be inferior to our OLED-on-silicon
products. The new generation of soldiers will be highly mobile, and will often
need to carry highly computerized communications and surveillance equipment. To
enable interaction with the digital battlespace, rugged, yet lightweight and
energy efficient technology is required. Currently available microdisplay
technologies do not meet the requirements for low power, hands-free, day and
night-viewable displays. Our OLED microdisplays demonstrate performance
characteristics important to military and other demanding commercial and
industrial applications including high brightness and resolution, wide dimming
range, wider temperature operating ranges, shock and vibration resistance and
insensitivity to high G-forces. The image does not suffer from flicker or color
breakup in vibrating environments, and the microdisplay's wide viewing angle
allows ease of viewing for long periods of time. The OLED's very low power
consumption reduces battery weight and increases allowed mission length Our high
brightness SXGA display, under development, is expected to provide luminance
levels in excess of 30,000 Cd/m2, will have a number of imbedded control
features, and is expected to use a small fraction of the power required for LCDs
(liquid crystal displays) or CRTs (cathode ray tubes) run at similar luminance
levels, and will permit the use of more compact optical systems. Properly
implemented, we believe that head-mounted systems incorporating our
microdisplays will increase effectiveness by allowing hands-free operation and
increasing situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. The OLED's wide temperature range
is especially of interest for military applications because the display can turn
on instantly at temperatures far below freezing and can operate at very high
temperatures in desert conditions.
Our OLED microdisplays were selected for several aircraft vehicles and
soldier applications, including the US Army Land Warrior 1.0 and 2.0 programs,
and Stryker Interoperative, and the US Air Force Joint Strike Fighter and Lil
Hal Digital Kneeboard, among others. Land Warrior, a core program in the Army's
drive to digitize the battlefield, is an integrated digital system that
incorporates computerized communication, navigation, targeting and protection
systems for use by the twenty-first century infantry soldier. Kaiser
Electro-Optics, a Rockwell Collins company and the principal contractor for the
US Army's Land Warrior HMD system, and eMagin will apply their respective
expertise in HMD and imaging technology to develop rugged, yet lightweight and
energy efficient products meeting the requirements of tomorrow's soldier. The US
Army expects to initially equip more than 40,000
10
soldiers with the Land Warrior system. The current overall redesign of the Land
Warrior system by General Dynamics and Rockwell Collins has delayed increased
volume use of displays beyond small quantities for that program until a future
date to be determined. Our display is also used in Kaiser Electro-Optics, Inc.'s
commercially available ProView S035 Monocular HMD. Night Vision Equipment
Corporation's HelmetIR-50(TM), a lightweight, military helmet mounted thermal
imager, which provides hands-free operation and allows viewers to see through
total darkness, battlefield obscurants, and even foliage, is the first
OLED-equipped product to be listed on the US Government's GSA schedule. The US
Air Force has selected our OLED microdisplay technology for incorporation into
the Strike Helmet 21 system. The Strike Helmet 21 system is targeted for
integration into F-15E aircraft in 2004-2005 time periods. We have been informed
by the US Air Force that our SXGA resolution OLED microdisplay, currently under
development, is planned to be used in programs such as Integrated Panoramic
Night Vision Goggles in avionics helmets and the Lil HAL digital kneeboard. We
cannot assure that the Government will remain on schedule. Similar systems are
of interest for other military applications as well as for related operations
such as fire and rescue.
Commercial, Industrial, and Medical
We believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; endoscopic surgery; and real-time viewing
of images and data for a variety of applications. As one potential example, a
user wearing a HMD while using test equipment, such as oscilloscopes, can view
technical data while simultaneously probing printed circuit boards. Commercial
products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM)
Thermal Imaging System and Liteye's 500, developed as an upcoming accessory to
Antelope Technologies' MCC Wearable Computing system, which incorporates IBM's
wearable PC technology. VRmagic GmbH, a leading developer of virtual reality
simulators, is using our OLED microdisplays in their EYESI(TM) Virtual Reality
Surgical Simulator, which provides real-time simulation of ophthalmic surgery,
high performance biomechanical tissue simulation, precision tracking, and
realistic stereo imaging. Sensics has incorporated our OLED displays in their
immersive SkyVizor (TM) virtual reality headset to serve as the "eyes" of the
Robonaut, a humanoid robot being developed by NASA and DARPA. The Robonaut
system can work side by side with humans, or alone in high-risk situations.
Telepresence uses virtual reality display technology to visually immerse the
operator into the robot's workspace, facilitating operation and interaction with
the Robonaut, and potentially reducing the number of dangerous space walks
required of real astronauts.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
o Entertainment and gaming video headset systems, which permit
individuals to view television, including HDTV, video CDs, DVDs and
video games on virtual large screens or stereovision in private
without disturbing others. Even though entertainment and gaming
headsets represent an emerging product class, we are seeing demand
from OEMs. Headset game systems for portable computers with head
tracking and/or stereovision appears to be our predominant high
quantity near term market opportunity, with several customers
indicating an interest in large production quantities of our displays.
Our current SVGA-3D display was designed specifically for this market.
We believe that these new headset game systems can provide a game or
telepresence experience not otherwise practical using conventional
direct view display technology. We expect low cost to be important for
success in this field, and expect our product cost to decrease in high
quantity production. At the 2004 Consumer Electronics Show, Leadtek
Research Inc. (Taiwan) announced that it was planning to introduce a
consumer HMD using eMagin SVGA-3D displays.
o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase privacy.
Current notebook computers do not use microdisplays. Our products can
apply not only to new models of notebook computers, but also as
aftermarket attachments to older notebooks still in use. The display
can be easily used as a second monitor on notebook computers for ease
of editing multiple documents to provide multiple screens or for data
privacy while traveling. It can also be
11
used to provide larger screen capability for viewing spreadsheets or
complex computer aided design (CAD) files. We expect to market our
head-wearable displays to be used as plug-in peripherals to be
compatible with most notebook computers. We believe that the SVGA-3D
microdisplay is well suited for most portable PC headsets. Our
microdisplays can be operated using the USB power source of most
portable computers. This eliminates added power supplies, batteries,
and rechargers and reduces system complexity and cost.
o Handheld personal computers, whose small, direct view screens are
often limitations, but which are now capable of running software
applications that would benefit from a larger display. Microdisplays
can be built into handheld computers to display more information
content on virtual screens without forfeiting portability or adding
the cost a larger direct view screen. Microdisplays are not currently
used in this market. We believe that GPS viewers and other novel
products are likely to develop as our displays become more available.
o Highly compact wearable computers and personal digital assistants, or
PDAs using video headsets as screens can be made possible by
high-resolution microdisplays. A lightweight pocketsize computer that
is less than one pound can potentially be created with a foldout
keyboard, compact input device, or voice actuation and a headset that
provides a near-desktop personal computer experience.
The combination of power efficiency, high resolution, low systems cost,
brightness and compact size offered by our OLED-on-silicon microdisplays has not
been made available to makers and integrators of existing entertainment and
gaming video headset systems, notebook computers and handheld computers. We
believe that our microdisplays will catalyze the growth of new products and
applications such as lightweight wearable computer systems.
Selected Applications by Market Sector
------------------------------------------- -------------------------------------------------
Sector Representative Applications
------------------------------------------- -------------------------------------------------
Portable Computer Peripheral |X| Notebook and SuperSubnotebook computer headsets
|X| Miniature data viewers
------------------------------------------- -------------------------------------------------
Entertainment |X| Games
|X| Headset Television/DVDs
------------------------------------------- -------------------------------------------------
Industrial, Medical, & |X| Surgery and Dentistry
Administration |X| Industrial Control and Safety
|X| Emergency Services
|X| Inventory and Retail
|X| Institutional Control
|X| Maintenance (Industry & Consumer)
|X| Communications
|X| Finance
|X| Education and Training
------------------------------------------- -------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced Vision
|X| Night Vision
|X| Handheld & Headmount Equipment
|X| Body worn displays
|X| Avionics (Helmet mount)
|X| Ground and Water Vehicles
|X| Maintenance & Training
|X| Special Applications
------------------------------------------- -------------------------------------------------
Telecommunications, Handheld, |X| Cell Phones/Headset phones
and Small Instruments |X| Handheld & Portable Internet Viewers
|X| Smart Appliances & Instruments
------------------------------------------- -------------------------------------------------
Advanced Computer |X| CAD/CAM
Applications |X| Virtual Reality and Simulations
|X| Ultra-High Resolution
|X| Telepresence
------------------------------------------- -------------------------------------------------
12
Our Strategy
Our strategy is to establish and maintain a leadership position as a
worldwide supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of our strategy to achieve these objectives include
the following:
o Leverage our superior technology to establish a leading market
position. As the first to exploit OLED-on-silicon microdisplays, we
believe that we enjoy a significant advantage in bringing this
technology to market.
o Develop products for large consumer markets via key relationships with
OEMs. Our relationships with OEMs whose products use microdisplays
have allowed us to identify initial microdisplay products to be
produced for entertainment, industrial, and military headsets, to be
followed by other applications such as digital cameras, camcorders and
hand-held Internet and telecommunications appliances. We target
markets which we believe to have long-term growth potential.
o Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain portions of
microdisplay production, such as chip fabrication, to minimize both
our costs and time to market. We intend to retain the OLED application
and OLED sealing processes in-house. We believe that these areas are
where we have a core competency and manufacturing expertise. We also
believe that by keeping these processes under tight control we can
better protect our proprietary technology and process know-how. This
strategy will also enhance our ability to continue to optimize and
customize processes and devices to meet customer needs. By performing
the processes in-house we can continue to directly make improvements
in the processes, which will improve device performance. We also
retain the ability to customize certain aspects such as color balance,
which is known as chromaticity, as well as specialized boards or
interfaces, and to adjust other parameters at the customer's request.
In the area of lenses and head-wearable displays, we intend to focus
on design and development, while working with third parties for the
manufacture and distribution of finished products. We intend to
prototype new optical systems, provide customization of optical
systems, and manufacture limited volumes at our subsidiary, Virtual
Vision, but intend to outsource high volume manufacturing operations.
There are numerous potential plastics, PC Board, and assembly service
companies globally that provide these outsource services.
o Build and maintain strong internal design capabilities. As more
circuitry is added to OLED-on-silicon devices, the cost of the end
product using the display can be decreased; therefore integrated
circuit design capability will become increasingly important to us. To
meet these requirements, we intend to develop in-house design
capabilities. Building and maintaining this capacity will allow us to
reduce engineering costs, accelerate the design process and enhance
design accuracy to respond to our customers' needs as new markets
develop. In addition, we intend to maintain a product design staff
capable of rapidly developing prototype products for our customers and
strategic partners. Contracting third party design support to meet
demand and for specialized design skills will also remain a part of
our overall long term strategy.
13
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
future research and development activities to better meet our customer's
requirements. Moreover, we expect to provide microdisplays and Microviewers(TM)
to some of these partners, thereby taking advantage of established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED materials,
and a potential future customer for both specialty market display systems and
consumer market microdisplays. We license Eastman Kodak's OLED and optics
technology portfolio. We have a nonexclusive, perpetual, worldwide license to
use Eastman Kodak patented OLED technology and associated intellectual property
in the development, use, manufacture, import and sale of microdisplays. The
license covers emissive active matrix microdisplays with a diagonal size of less
than 2 inches for all OLED display technology previously developed by Kodak. An
annual minimum royalty is paid at the beginning of each calendar year and is
fully creditable against the royalties we are obligated to pay based on net
sales throughout the year. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by Eastman Kodak.
We are working in cooperation with the US Air Force, Ball Aerospace, ITT,
and Kaiser Electro-optics, a subsidiary of Rockwell Collins, to complete
development and characterization of our high brightness SXGA microdisplay. We
are working cooperatively with the US Army and with several system integrators
to further characterize operation of our displays in rugged military
environments.
We have recently announced the execution of an agreement with Rohm
Corporation of Japan to develop two new products: an enhanced version of our
SVGA-3D microdisplay with new imbedded features for consumer head-mounted
displays and high resolution games, and a new QVGA and/or VGA viewfinder
microdisplay for camcorder and digital cameras, web phones, and low end games.
We are a member of the United States Display Consortium, a cooperative
agency of display and related technology manufacturers whose charter is to
support continued progress of the display industry. We intend to continue to
establish additional strategic relationships in the future.
Our Technology Platforms
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s.
OLEDs are thin films of stable organic materials that emit light of various
colors when a voltage is impressed across them. OLEDs are emissive devices,
which means they create their own light, as opposed to liquid crystal displays,
which require a separate light source. As a result, OLED devices use less power
and can be capable of higher brightness and fuller color than liquid crystal
microdisplays. Because the light they emit is Lambertian, which means that it
appears equally bright from most forward directions, a moderate movement in the
eye does not change the image brightness or color as it does in existing
technologies. OLED films may be coated on computer chips, permitting millions of
individual low-voltage light sources to be built on silicon integrated circuits
to produce single color, white, or full-color display arrays. Many computer and
video electronic system functions can be built directly into a silicon
integrated circuit as part of the OLED display, resulting in an ultra-compact
system. We believe these features, together with the well-established silicon
integrated circuit fabrication technology of the semiconductor industry, make
our OLED-on-silicon microdisplays attractive for numerous applications.
We believe our technology licensing agreement with Eastman Kodak, coupled
with our own intellectual property portfolio, gives us a leadership position in
OLED and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED
technology and we provide additional technology advancements that have enabled
us to coat the silicon integrated circuits with OLEDs.
We have developed numerous and significant enhancements to OLED technology
as well as key silicon circuit designs to effectively incorporate the OLED film
on a silicon integrated circuit. For example, we have developed a unique,
up-emitting structure for our OLED-on-silicon devices that enables OLED displays
to be built on opaque silicon integrated circuits rather than only on glass. Our
OLED devices can emit full visible spectrum
14
light that can be isolated with color filters to create full color images. Our
microdisplay prototypes have a brightness that can be greater than that of a
typical notebook computer and can have a potential useful life of over 50,000
operating hours, in certain applications. New materials and device improvements
in development offer future potential for even better performance for
brightness, efficiency, and lifespan. Additionally, we have invested
considerable work over several years to develop unique electronics control and
drive designs for OLED-on-silicon microdisplays.
In addition to our OLED-on-silicon technology, we have developed compact
optic and lens enhancements which, when coupled with the microdisplay, provide
the high quality large screen appearance that we believe a large proportion of
the marketplace demands.
Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant
advantages over existing solutions in our targeted microdisplay markets. We
believe these key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen size;
o Low power consumption for improved battery life and longer system
life;
o High brightness for improved viewing;
o High-speed performance resulting in clear video images;
o Wide operating temperature range; and
o Good environmental stability (vibration and humidity).
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on
an 8-inch silicon wafer using existing automated OLED and color filter
processing tools. The level of automation used lowers labor costs. Only a minute
amount of OLED material is used in each OLED-on-silicon microdisplay so that
material costs, other than the integrated circuit itself, are small. The number
of displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal
band.
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are made of a single piece of molded plastic,
which reduces size, weight and assembly cost when compared to the multipiece
lens systems used for liquid crystal microdisplays. System cost relative to
liquid crystal and liquid crystal on silicon, or LCOS competitive products is
thus reduced. Because our displays are power efficient, they typically require
less power at the system level than other display technologies at a given
display size and brightness.
Wide-angle light emission simplifies optics for large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective LCOS microdisplays. This results in less eye fatigue and makes it
relatively easy to Low power consumption for improved battery life and longer
system life. OLEDs emit light rather than transmitting it, so no power-consuming
backlight or frontlight, as required for liquid crystal displays, is required.
OLEDs can be energy efficient because of their high efficiency light generation.
15
Furthermore,OLEDs conserve power by powering only those pixels that are on while
liquid crystal on silicon requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient, permitting over 80% of
the light to reach the eye, whereas reflective technologies such as liquid
crystal on silicon require multiple beam splitters to get light to the display,
and then into the optical system. This results in typically less than 25% light
throughput efficiency in reflective microdisplay systems. Most important, we do
not need a power-hungry video frame buffer, as required in liquid crystal
frame-sequential color systems. Battery life can therefore be long.
High brightness for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed performance resulting in clear video images. The OLEDs switch
much more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free and no color breakup. Because the OLED-on-silicon stores
brightness and color information at each pixel, the display can be run with no
noticeable flicker and no color sequential breakup, even at low refresh rates. A
lower refresh rate not only helps reduce power, but it also facilitates system
integration. Color sequential breakup occurs in systems such as liquid crystal
on silicon and some liquid crystal display microdisplays when red, green and
blue frames are sequentially imaged in time for the eye to combine. Since the
different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a difficult technological challenge as display
resolutions increase.
Wide operating temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller range
on most products to accommodate low cost packaging. This is an important
characteristic for many portable products that may be used outdoors in many
varying environmental conditions. It is especially important for military
customers. Insensitivity to vibration, shock, and pressure are also important
environmental control attributes.
Complementary Lens and System Technologies
We have developed a wide range of technologies which complement our core
OLED and lens technologies and which will enhance our competitive position in
the microdisplay and head-wearable display markets. These include:
Lens technology. We have developed advanced lens technology for
microdisplays and head-wearable display systems and hold key patents in these
areas. Our lens technology permits our OLED-on-silicon microdisplays to provide
large field of view images that can be viewed for extended periods with reduced
eye-fatigue. We have engaged a firm to manufacture our lenses in order to
provide them in larger quantities to our customers, assuming the final version
of the production lens becomes available and moves into production by our
manufacturing partner.
We believe that the key advantages of our lens technology include:
o Can be very low cost, with minimal assembly. A one piece, molded
plastic optic attached to the microdisplay can serve many consumer
end-product markets. Since our process is plastic molding, our per
unit production costs are low;
16
o Allows a compact and lightweight lens system that can greatly magnify
a microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use of
less power for an acceptable brightness;
o Can be designed to provide focusing to enable users with various
eyesight qualities to view images clearly; and
o Can optionally provide focal plane adjustment for simultaneous
focusing of computer images and real world objects. For example, this
characteristic is beneficial for word processing or spreadsheet
applications where a person is typing data in from reference material.
This feature can make it easier for people with moderately poor
accommodation to use a head-wearable display as a portable
computer-viewing accessory.
Head-wearable display technology. We have developed ergonomic technologies
that make head-wearable displays easier to use in a wide variety of
applications. For example, the use of our patented rotatable Eyeblocker(TM)
provides a sharp image without requiring most users to squint. The Eyeblocker
can also be moved to create an effective see-through appearance. To our
knowledge, we have made the lightest weight, high-resolution head-wearable
display with an over 35 degree diagonal field of view ever publicly
demonstrated.
Wireless video technology. We have developed power efficient, miniature,
video and stereo sound, radio frequency transmitter-receiver technology as part
of a government program. This could allow consumers to watch wireless high
quality video from most locations in their home using existing entertainment,
such as DVD or cable/satellite systems, or data systems. If commercialized, we
expect this capability to greatly increase the available market and demand for
video and data head-wearable displays and we are considering this technology for
use in low cost consumer applications. Commercialization of this technology will
be considered in the future.
Sales and Marketing
We primarily provide display components and Microviewer(TM) display-optic
modules for OEMs to incorporate into their branded products and sell through
their own well-established distribution channels. In addition, we market
head-wearable displays directly to various vertical market channels, such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.
We market our services primarily in North America, Asia, and Europe through
direct technical sales from our headquarters. Regular purchase orders are
processed by our Customer Service Coordinator and technical questions related to
product purchases or product applications are processed by our Technical Support
Coordinator. Additional sales are generated through our subsidiary, Virtual
Vision, and through our sales office located in Japan. We are in the process of
selecting worldwide distributors.
As a market-driven company, we assess customer needs both quantitatively
and qualitatively, through market research and direct communications. Because
our microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define our
products to optimize the final design, typically on a senior
engineer-to-engineer basis.
We identify companies with end products and applications for which we
believe that our products will provide a system level solution and for which our
products can be a key differentiator. We target both market leaders and select
early adopter companies; their acceptance validates our technology and approach
in the market. We believe successful marketing will require relationships with
recognized consumer brand companies.
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay, which
contains 1.53 million picture elements, was specifically designed to meet the
needs of several military, industrial, and medical customers based on marketing
17
information obtained prior to the design phase of the display and was first
offered for sampling in April 2001. Our stereovision-capable SVGA-3D
microdisplay, which contains 1.44 million picture elements, was designed with
the input of multiple customers to principally target the mobile personal
computer and PC games markets, and was first shipped in February 2002. We are
currently developing a military and industrial oriented ultra-high-luminance
SXGA resolution integrated circuit, which contains 3.9 million picture elements,
that is due for completion in 2004, and we have shipped limited quantities of
prototypes of our eGlass headsets.
Near term sales efforts have been focused on our military, industrial, and
medical customers. We have received production orders and design wins for both
the SVGA+ and SVGA 3D displays. To date, we have shipped products and evaluation
kits to more than 100 OEM customers. An OEM design cycle typically requires
between 6 and 24 months, depending on the uniqueness of the market and the
complexity of the end product. New product development may require several
design iterations prior to commercialization. Some of our initial customers have
completed their initial evaluation cycle and we are now receiving follow-on
orders and notification of product purchase decisions. Several customers have
indicated their intent to incorporate potentially high volumes of our
microdisplays into consumer products beginning in 2004 through 2006, pending
successful completion of their own product development efforts. We have also
received notification that our microdisplays will be used as components in
versions 1.0 and 2.0 of the US Army Land Warrior program and in the US Air Force
Joint Strike Fighter program, among other programs. (See "Our Market
Opportunity: Military; Commercial, Industrial, and Medical; and Consumer")
Customers
Customers for our products include both large multinational and smaller
OEMs. We maintain relationships with OEMs in a diverse range of industries
encompassing the military, industrial, medical, and consumer market sectors.
During 2003, 70% of our sales were to firms based in the United States and 30%
were to international firms, compared to 74% domestic sales and 26%
international sales during 2002. In 2003, three customers accounted for 37% of
sales. One customer represented 21% of sales and the other two represented 8%
each. In 2002, our customer base included two customers who accounted for 32% of
sales. One customer represented 18% and the other customer represented 14% of
sales. We anticipate that international sales will continue to increase as a
percentage of our sales.
Backlog
As of December 31, 2003 we had a backlog of purchase agreements of
approximately $30 million. The majority of our backlog consists of purchase
agreements for delivery over the next 24 months. Most purchase orders are
subject to rescheduling or cancellation by the customer with no or limited
penalties. Because of the possibility of customer changes in delivery schedules
or cancellations and potential delays in product shipments, our backlog as of a
particular date may not be indicative of net sales for any succeeding period.
Lack of working capital through the early part of 2003 delayed our ability to
ship the full quantity of purchase agreements and purchase orders on hand, and
has required negotiations with customers for delays in product launch schedules.
Some customers have experienced delays in their expected product launch
schedules due to their own product development delays not directly related to
our microdisplays. Some new eMagin products such as PC interfaces and cables may
help customers begin their production more quickly, but there is no guarantee
that this will occur. eMagin's deliveries of wafers and other supplies could
play a negative roll in our 2004 shipments due to capacity and technical issues
at our suppliers, such as TSMC in Taiwan.
Research and Development
Near-to-the-eye virtual imaging and OLED technology are relatively new
technologies that have considerable room for substantial improvements in
luminance, life, power efficiency, voltage swing, design compactness, field of
view, optical range of visibility, and many other parameters. We also anticipate
that achieving reductions in manufacturing costs will require new technology
developments. We anticipate that improving the performance, capability and cost
of our products will provide an important competitive advantage in our fast
moving, high technology marketplace. Past and current research activities
include development of improved OLED and display device structures, developing
and/or evaluating new materials (including the synthesis of new organic
molecules), manufacturing equipment and process development, electronics design
methodologies and new circuits
18
and the development of new lenses and related systems. During 2002 and 2003 we
focused primarily on near-term product development projects related to our
transition from research to manufacturing. For example we developed a glass
cover plate to ruggedize our displays to facilitate easier handling by our OEM
customers. We also developed a new high luminance, high efficiency yellow
monochrome OLED and adapted to our SVGA+ display for see-through optic
applications and began sampling the yellow monochrome product in early 2003.
However, in order to improve customer satisfaction and simultaneously maximize
our margins, as well as to maintain competitive technology advantages, we
believe that it is important to continue to engage in long-term research and
development. During the past eight years, we have spent, net of U.S. government
funding, approximately $34 million on research and development. In 2001, we
spent approximately $13 million, and in 2002 we spent approximately $7 million
on research and development. During 1998-2002 we received approximately $4
million in funding from US government under research and development cost
sharing arrangements. Currently, eMagin is almost entirely focused on production
ramping, but contract R&D is expected to eventually resume at moderate levels.
External relationships play an important role in our research and
development efforts. Suppliers, equipment vendors, government organizations,
contract research groups, external design companies, customer and corporate
partners, consortia, and university relationships all enhance the overall
research and development effort and bring us new ideas (See "Strategic
Relationships").
Manufacturing Facilities
We are located at IBM's Microelectronics Division facility, known as the
Hudson Valley Research Park, located about 70 miles north of New York City in
Hopewell Junction, New York. We lease approximately 40,000 square feet of space
housing our own equipment for OLED microdisplay fabrication and for research and
development plus additional space for assembly and administrative offices. We
believe that our lease agreement with IBM for a 16,300 square foot class 10
clean room space, along with additional, lower level clean room space, and the
associated acquisition of substantial amounts of advanced manufacturing
equipment is at a favorable cost, representing a substantial asset and
competitive advantage.
Our lease expired in March of 2004. As a result we currently occupy the
same space on a month to month basis for approximately $69,000 per month. We are
currently in negotiations for a new lease.
Facilities services provided by IBM include our cleanroom, pure gases, high
purity de-ionized water, compressed air, chilled water systems, and waste
disposal support. This infrastructure provided by our lease with IBM provides us
with many of the resources of a larger corporation without the added overhead
costs. It further allows us to focus our resources more efficiently on our
product development and manufacturing goals. We believe that our facility is
anticipated to be capable of producing over 50,000 SVGA+ or SVGA-3D displays per
month once we are manufacturing around the clock on a 24 hours a day, 7 days per
week basis, with ample supplies and a fully loaded manufacturing line.
We lease additional non-cleanroom facilities for chemical mixing, cleaning,
chemical systems, and glass/silicon cutting. OLED chemicals can be purified in
our facility with our own equipment, permitting the company to evaluate new
chemicals in pilot production that are not yet available in suitable purity for
OLED applications on the market.
Our display fabrication process starts with the silicon wafer, which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a combination of internal and external designers with
customer participation, we outsource wafer fabrication.
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
19
Our system development effort at Virtual Vision operates out of a leased
facility in Redmond, Washington. The facilities are well suited for designing
and building limited volume prototypes and small quantity industrial or
government products. Cables and electronic interfaces have recently been
produced to permit our OEM customers to more rapidly create products and shorten
their time-to-market. We plan to outsource medium to high volume subsystem
production to low cost plastics, lenses, and assembly manufacturers. We are
currently using outside manufacturers including manufacturers in Asia and other
locations, plus we are investigating new outsource opportunities.
We believe that manufacturing efficiency is an important factor for success
in the consumer markets. We believe that high yield and maximum utilization of
our equipment set will be key for profitability. We believe that all of the main
components for manufacturing success are in place, but we will require
additional capital to: (i) staff and train employees for round the clock
operation, (ii) build suitable inventory of integrated circuits and other raw
materials, and (iii) properly maintain and continue to upgrade the equipment set
from time to time. The equipment required for initial profitable production is
in place. Some equipment will be added when our production volume increases or
as needed. We will initially ramp production primarily by adding multi-shift
staff and increasing inventory.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures are
being considered for higher quantity OLED production off shore should suitable
resources not be available for US expansion. We currently outsource all our
integrated circuit fabrication while retaining the final metal, OLED
application, color filter, OLED sealing, and sample packaging processes
in-house.
Intellectual Property
We have developed a significant intellectual property portfolio of patents,
trade secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our license from Eastman Kodak gives us the right to use in miniature
displays a portfolio in organic light emitting diode and optics technology, some
of which are fundamental. Our agreement with Eastman Kodak provides for
perpetual access to the OLED technology for our OLED-on-silicon applications,
provided we remain active in the field and meet our contractual requirements to
Eastman Kodak. We also generate intellectual property as a result of our
internal research and development activities.
Our patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our patents are concentrated in the following areas:
o OLED Materials, Structures, and Processes;
o Display Color Processing and Sealing;
o Active Matrix Circuit Methodologies and Designs;
o Field Emission and General Display Technologies;
o Lenses and Tracking (Eye and Head);
o Ergonomics and Industrial Design; and
o Wearable Computer Interface Methodology
20
We also rely on proprietary technology, trade secrets, and know-how, which
are not patented. To protect our rights in these areas, we require all
employees, and where appropriate, contractors, consultants, advisors and
collaborators to enter into confidentiality and noncompetition agreements. There
can be no assurance, however, that these agreements will provide meaningful
protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information.
We believe that our intellectual property portfolio, coupled with our
strategic relationships and accumulated experience in the OLED field gives us an
advantage over potential competitors.
Competition
We may face competition in the OLED and microdisplay industry from a
variety of companies and technologies. We believe that our key competition will
come from liquid crystal on silicon microdisplays, or LCOS, also known as
reflective liquid crystal displays. While we believe that OLED-on-silicon
provides comparatively lower optics cost, larger apparent image size, reduced
electronics cost and complexity, enhanced color, and improved power efficiency
advantages over liquid crystal on silicon microdisplays, there is no assurance
that these benefits will be realized or that liquid crystal on silicon
manufacturers will not suitably improve these parameters. Companies pursuing
liquid crystal on silicon technology include Microdisplay Corporation and
Brillian Corporation, among others, although most of the companies are primarily
focusing on projection microdisplays, which do not compete directly with the
company. In certain markets, we may also face competition from developers of
transmissive liquid crystal displays, such as those developed by Kopin, or laser
scanning systems, such as those developed by Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye applications is MicroEmissive Displays
in Britain. We may also compete with potential licensees of Universal Display
Corporation, Cambridge Display Corporation, and Uniax Corporation, each of which
license OLED technology portfolios. Even though we could potentially license
technology from these developers, potential competitors could also obtain such
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face competition on
a price and performance basis from major manufacturers such as Sony and Seiko
Epson. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporate our
technology into their products when it becomes available.
Employees
As of March 5, 2004, we had a total of 47 full time, part time, and
temporary staff, including 6 employees at Virtual Vision. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 40,000 square feet of space
from IBM, all of which is located in the same industrial park. Approximately
30,000 square feet of space houses our own equipment for OLED microdisplay
fabrication, and for research and development plus additional space for assembly
operations and storage. There are space reductions planned as we look to improve
efficiency and costs. Approximately 10,000 square feet of space is used for
administrative offices.
Our lease expired in March of 2004. As a result we currently occupy the
same space on a month to month basis for approximately $69,000 per month. We are
currently in negotiations for a new lease.
Our lenses and system development operation at Virtual Vision lease
approximately 7,000 square feet of space in Redmond, Washington. The lease for
this facility runs until December 2004.
21
During March 2004 we upgraded our telecommunication system to a digital
system, and our phone and fax numbers changed. eMagin Corporation's main
telephone number is (845) 838-7900 and our main fax number is (845) 838-7901.
Our website address is www.emagin.com.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the American Stock Exchange under
the symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000
our common stock had been quoted on the OTC Bulletin Board under our prior name
"Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there
had been no public trading of FSHD.
As of March 30, 2004, there were 480 holders of record of 62,996,760 shares
of Common Stock. This does not reflect those shares held beneficially or those
shares held in "street" name.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future.
The table below sets fort the high and low closing prices per share of the
common stock for each full quarterly period in the last two fiscal years and the
year to date as reported on the American Stock Exchange and the OTC Bulletin
Board. With respect to OTC Bulletin Board quotes, these prices reflect
inter-dealer prices, without retail mark-up, markdown or commissions and may not
represent actual transactions.
High Low
------------------------------------------------------------------- ----------------- ----------
2002
------------------------------------------------------------------- ----------------- ----------
First Quarter 1.75 0.42
------------------------------------------------------------------- ----------------- ----------
Second Quarter 0.89 0.20
------------------------------------------------------------------- ----------------- ----------
Third Quarter 0.54 0.20
------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 0.40 0.17
------------------------------------------------------------------- ----------------- ----------
-------------------------------------------------------------------
----------------- ----------
2003
------------------------------------------------------------------- ----------------- ----------
First Quarter 1.00 0.33
------------------------------------------------------------------- ----------------- ----------
Second Quarter 0.85 0.50
------------------------------------------------------------------- ----------------- ----------
Third Quarter 1.99 0.51
------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 1.74 1.15
------------------------------------------------------------------- ----------------- ----------
------------------------------------------------------------------- ----------------- ----------
2004
------------------------------------------------------------------- ----------------- ----------
Through March 31, 2004 3.15 1.40
------------------------------------------------------------------- ----------------- ----------
On March 31, 2004, the last sale price for the Common Stock was $2.09.
Equity Compensation Plan Information
22
------------------------------------ ------------------------ ---------------------- ------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
As of December 31, 2003 warrants and rights
------------------------------------ ------------------------ ---------------------- ------------------------
(a) (b) (c)
------------------------------------ ------------------------ ---------------------- ------------------------
Equity compensation plans approved 12,148,570 0.53 2,091,437
by security holders
Equity compensation plans not 0 0.0 0
approved by security holders
------------------------------------ ------------------------ ---------------------- ------------------------
Total 12,148,570 0.53 2,091,437
==================================== ======================== ====================== ========================
23
Recent Issuances of Unregistered Securities.
None for the fourth quarter of the fiscal year ended December 31, 2003.
The following issuances occurred subsequent to December 31, 2003:
On January 9, 2004, we entered into a Securities Purchase Agreement with
several accredited institutional and private investors whereby such investors
purchased an aggregate of 3,333,364 shares of common stock for an aggregate
purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average
closing price of the stock from December 30, 2003 to January 6, 2004, which
ranged from $1.38 to $1.94 per share during the period for a purchase price of
$1.26 per share. In addition, the investors received warrants to purchase an
aggregate of 2,000,019 shares of common stock (subject to anti-dilution
adjustments) exercisable at a price of $1.74 per share for a period of five (5)
years. The warrants were priced at a 10% premium to the average closing price of
the stock for the pricing period.
eMagin also issued additional warrants to the investors to acquire an
aggregate of 2,312,193 shares of common stock. 1,206,914 of such warrants are
exercisable, within 6 months from the effective date of the registration
statement covering these securities, at a price of $1.74 per share (a 10%
premium to the average closing price of the stock for the pricing period), and
1,105,279 of such warrants are exercisable within 12 months from the effective
date of the registration statement covering these securities, at a price of
$1.90 per share (a 20% premium to the average closing price of the stock for the
pricing period).
In February 2004, we entered into an agreement whereby the holders of our
Secured Convertible Notes (the "Notes"), which are due in November 2005, agreed
to an early conversion of 100% of the $7.825 million principal amount of the
Notes, together with the $742,424 of accrued interest on the Notes, into
11,394,621 shares of common stock of eMagin. The listing of the shares issuable
pursuant to such agreement was approved by the American Stock Exchange on March
3, 2004.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "Warrants"), which Warrants
are exercisable at a price of $2.76 per share. 1.5 million of the Warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the Warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission.
The issuance of the shares and the warrants was exempt from registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of such
Securities Act and Regulation D promulgated thereunder based upon the
representations of each of the Investors that it was an "accredited investor"
(as defined under Rule 501 of Regulation D) and that it was purchasing such
securities without a present view toward a distribution of the securities. In
addition, there was no general advertisement conducted in connection with the
sale of the securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of our financial condition and results of our
operations should be read in conjunction with the Financial Statements and Notes
thereto. Our fiscal year ends December 31. This document contains certain
forward-looking statements including, among others, anticipated trends in our
financial condition and results of operations and our business strategy. (See
"Factors Which May Affect Future Results"). These forward-looking statements are
based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these
forward-looking statements. Important factors to
24
consider in evaluating such forward-looking statements include (i) changes in
external factors or in our internal budgeting process which might impact trends
in our results of operations; (ii) unanticipated working capital or other cash
requirements; (iii) changes in our business strategy or an inability to execute
our strategy due to unanticipated changes in the industries in which we operate;
and (iv) variouscompetitive market factors that may prevent us from competing
successfully in the marketplace.
Overview
We design and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
primarily for incorporation into the products of other manufacturers.
Microdisplays are typically smaller than many postage stamps, but when viewed
through a magnifier they can contain all of the information appearing on a
high-resolution personal computer screen. Our microdisplays use organic light
emitting diodes, or OLEDs, which emit light themselves when a current is passed
through the device. Our technology permits OLEDs to be coated onto silicon chips
to produce high resolution OLED-on-silicon microdisplays.
We believe that our OLED-on-silicon microdisplays offer a number of
advantages in near to the eye applications over other current microdisplay
technologies, including lower power requirements, less weight, fast video speed
without flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our inception in 1996, we derived the majority of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of December 31, 2003, we had
recognized an aggregate of approximately $4.3 million from sales of our
products, and have a backlog of more than $30 million in products ordered for
delivery through 2005. These products are being applied or considered for
near-eye and headset applications in products such as entertainment and gaming
headsets, handheld Internet and telecommunication appliances, viewfinders, and
wearable computers to be manufactured by original equipment manufacturer (OEM)
customers. We have also shipped a limited number of prototypes of our eGlass II
Head-wearable Display systems. In addition to marketing OLED-on-silicon
microdisplays as components, we also offer microdisplays as an integrated
package, which we call Microviewer that includes a compact lens for viewing the
microdisplay and electronic interfaces to convert the signal from our customer's
product into a viewable image on the microdisplay. Through our wholly owned
subsidiary, Virtual Vision, Inc., we are also developing head-wearable displays
that incorporate our Microviewer.
We license our core OLED technology from Eastman Kodak and we have
developed our own technology to create high performance OLED-on-silicon
microdisplays and related optical systems. We believe our technology licensing
agreement with Eastman Kodak, coupled with our own intellectual property
portfolio, gives us a leadership position in OLED and OLED-on-silicon
microdisplay technology. We are the only company to demonstrate publicly and
market full-color OLED-on-silicon microdisplays.
Company History
Our history has been as a developmental stage company. As of January 1,
2003, we were no longer classified as a development stage company. We have
transitioned to manufacturing our product and intend to significantly increase
our marketing, sales, and research and development efforts, and expand our
operating infrastructure. Most of our operating expenses are fixed in the near
term. If we are unable to generate significant revenues, our net losses in any
given period could be greater than expected.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
25
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition.
Revenue and Cost Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title to the goods has changed and there is a
reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
Revenues from research and development activities relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues from
research and development activities relating to cost-plus-fee contracts include
costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can be billed on a bi-monthly basis. Billing is based on subjective cost
investment factors.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates and assumptions relate to recording net revenue,
collectibility of accounts receivable, and the realizability of other intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates;
however, actual results could differ from these estimates. Consequently, change
in conditions could affect our estimates.
Fair value of financial instruments:
We have various financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable and capitalized lease obligations. We
believe the carrying values of our financial instruments approximate their
values. The carrying amount of the short- and long-term debt approximates fair
value at December 31, 2003 based on interest rates available to us and debt
instruments with similar terms.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues
Revenues increased by $0.5 million to a total of $2.6 million for the year ended
December 31, 2003 from $2.1 million for the year ended December 31, 2002,
representing an increase of 21%. This increase was due primarily to the
transitioning from research and development to product manufacturing and sales.
Our contract revenue decreased approximately $0.5 million while our product
revenue increased approximately $1.0 million.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs associated with production
and inventory losses. In the year ended December 31, 2003 we recorded
approximately $5.1 million in cost of goods sold which resulted in a gross loss
of $2.6 million. We expect to prorate a gross profit as we make improvements to
our production line and production staff and increase the utilization of our
production line. In 2003 production was running at a very small portion of our
fabrication line's capacity. We have no relevant production amounts to compare
to, as in 2002 production was at a sampling level.
26
Research and Development Expenses
Gross research and development expenses decreased by $7.3 million to a total of
$19 thousand for the year ended December 31, 2003 from $7.3 million for the year
ended December 31, 2002, representing a 100% decrease. Of these amounts, we
received $0 in cost sharing from the U.S. government for the year ended December
31, 2003, and $0.3 million for the year ended December 31, 2002. The $7.3
million decrease in R&D expenses for the year ended December 31, 2003 reflects
reduction in staffing and reduction in expenditures related to significant cost
reduction measures undertaken by the company in 2002 and 2003.
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense decreased by $1.0 million to $0.3
million for the year ended December 31, 2003 from $1.3 million for the year
ended December 31, 2002. The decrease is the result of our purchase intangibles
being fully amortized as of March 2003.
Gain on Debt Restructuring
In 2003 we were successful in negotiating with our creditors to reduce amounts
currently owed to them and future contractual obligations. For the year ended
December 31, 2003 we recorded ($4.6) million in gain on debt restructuring. We
also negotiated our lease payments down from approximately $0.3 million a month
to approximately $10 thousand a month.
Non-Cash Stock Based Compensation
Non-cash stock based compensation for the year ended December 31, 2003 increased
$0.6 million to a total of $2.2 million as compared to $1.6 million for the year
ended December 31, 2002. This increase is primarily due to the difference
between the strike price of the options set at the market price when granted in
October 2002 and the price of the Company's stock on July 2, 2003 when the
options granted in October 2002 were issued under the 2003 Employee Stock Option
Plan. Non-cash stock-based compensation costs are the result of amortization of
the intrinsic value ascribed for the issuance of stock options at the time of
grant. The amortization is done over the vesting period of such options.
Selling, General and Administrative Expenses
General and administrative expenses decreased by $1.4 million to a total of $3.1
million for the year ended December 31, 2003 from $4.5 million for the year
ended December 31, 2002. The decrease in selling, general and administrative
expenses was due primarily to reductions in personnel costs, patent filings, and
legal fees. We expect marketing, general and administrative expense to increase
in future periods as we add to our sales staff and make additional investments
in marketing activities.
Other Income (Expense)
Other expenses decreased by $1.2 million to a total of ($1.1) million for the
year ended December 31, 2003 from ($2.3) million for the year ended December 31,
2002. The decrease was due primarily to decreased beneficial conversion of debt
recorded as interest expense.
The following provides a reconciliation of information used in calculating
the per share amounts for the year ended December 31, 2003 and 2002.
Loss attributable to common shareholders
(In thousands except per share amounts)
2003 2002
---- ----
Net loss $ (4,723) $ (14,913)
=============== ====================
Weighted average shares outstanding 35,998 29,417
=============== ====================
Basic and diluted loss per common share $ (0.13) $(0.51)
=============== ====================
27
Balance Sheet Data as of December 31, (In thousands)
2003 2002
----------------------------------- ------------------ ------------------
Cash and cash equivalents $ 1,054 $ 83
----------------------------------- ------------------ ------------------
Working capital (deficit) (106) $(13,601)
----------------------------------- ------------------ ------------------
Total assets 3,749 1,834
----------------------------------- ------------------ ------------------
Total liabilities 8,516 14,642
----------------------------------- ------------------ ------------------
Total capital deficiency $ (4,767) $(12,808)
----------------------------------- ------------------ ------------------
Liquidity and Capital Resources
Current Financial Position
In April 2003, we closed on a $6.0 million financing and in January 2004 we
closed on a $4.2 million financing. We estimate that these are the minimum
amount of funds that we require to support us until we begin realizing sales
from production in sufficient amount to become profitable through production
alone. As of March 30, 2004 we currently have approximately $4.7 million in
cash-on-hand. We have made strategic purchases of raw materials and hired
additional production personnel to support our continued ramp up of our
production line. We believe with these investments, our continued increase of
sales and marketing effort, and cash flow from the exercising of warrants and
options, we are in a strong position to complete our plan to meet our sales
goals
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be the principal use of our cash. In particular, we expect that
salaries for employees engaged in production operations, purchase of inventory
and expenses of increased sales and marketing efforts would be the principle
uses of cash. We expect that our cash requirements over the next 12 months will
be met by our cash on hand and funds generated by operations. In addition, we
hope to continue to devote substantial resources to manufacturing, marketing and
selling our products.
We have received purchase agreements for our products to be delivered now
through 2004 and into early 2005. Management believes that the prospects for
growth of product revenue remain high.
We are currently ramping up our production, which progress was impeded by our
cash position earlier in the year. Anticipated increased shipments in the first
quarter were delayed, primarily due to our inability to purchase raw materials.
As a result, our customer schedules had been pushed out due to our financing
issues, but these shipments were renegotiated once the funding was committed. We
were able to produce quantities in the late third quarter of 2003. We do not
currently anticipate any significant loss of business as a result of our prior
financing related product ramp delays, other than the shift in delivery
schedules. We have been increasing supplies and staffing quickly and efficiently
to meet the anticipated shipping schedules.
Our cash requirements depend on numerous factors, including completion of our
new product development activities, ability to commercialize our products,
timely market acceptance of our products and our customer's product, and other
factors. We expect to carefully devote capital resources to continue our
development programs directed at commercializing our products in our target
markets, hire and train additional staff, expand our research and development
activities, develop and expand our manufacturing capacity and begin production
activities. Any delays could change the cash requirements of the company. While
we believe that we are in position to handle a significant production increase,
there can be no assurance that we will not experience some issues relating to
yield and throughput risk, as well as supply delivery risk that could result in
production delays.
28
Subsequent Events
January 2004 - Equity Financing
In January 2004, we entered into a Securities Purchase Agreement with several
accredited institutional investors (collectively, the "Investors") whereby the
Investors agreed to purchase an aggregate of approximately $4.2 million in
exchange for an aggregate of approximately 3.3 million shares of common stock.
The purchased shares were priced at a 20% discount to the average closing price
of the stock from December 30, 2003 to January 6, 2004, which ranged from $1.38
to $1.94 per share during the period for a purchase price of $1.26 per share
after the 20% discount. In addition, the investors received warrants to purchase
an aggregate of 2.0 million shares of common stock (subject to anti-dilution
adjustments) exercisable at a price of $1.74 per share for a period of five (5)
years. The warrants were priced at a 10% premium to the average closing price of
the stock for the period.
In connection with the private placement, we also issued additional warrants to
the investors to acquire 2.3 million shares of common stock. 1.2 million of such
warrants are exercisable, within 6 months from the effective date of the
registration statement covering these securities, at a price of $1.74 per share
(a 10% premium to the average closing price of the stock for the period), and
1.1 million of such warrants are exercisable within 12 months from the effective
date of the registration statement covering these securities, at a price of
$1.90 per share (a 20% premium to the average closing price of the stock for the
period).
At December 31, 2003, we had $1,118,753 and $511,796 of unamortized debt
discount and beneficial conversion feature in connection with the Notes. The
beginning balance at the conversion date will be charged to operations.
In connection with the completion of the transactions under the Securities
Purchase Agreement, we also entered into a Registration Rights Agreement dated
as of January 9, 2004 providing the Investors with certain registration rights
under the Securities Act of 1933, as amended, with respect to the Company's
common stock issued and the common stock issuable upon exercise of the Warrants.
February 2004 - Conversion of April 2003 Notes
In February 2004, we entered into an agreement whereby the holders of our
Secured Convertible Notes (the "Notes"), which are due in November 2005, agreed
to an early conversion of 100% of the principal amount of the Notes, together
with all of the accrued interest on the Notes, into 11,394,621 shares of common
stock of eMagin. The listing of the shares issuable pursuant to such agreement
was approved by the American Stock Exchange on March 3, 2004. This debt, net of
the unamortized portion of debt discount and the beneficial feature, is shown as
a long-term liability in the consolidated balance sheet.
The principal amount of the Notes, which were all issued pursuant to the Global
Restructuring and Secured Note Purchase Agreement dated as of April 25, 2003,
was $7.825 Million. This amount included $6.0 Million of new notes issued in
April 2003 and $1.825 million of amended and restated notes that were originally
between November 2001 and June 2002. In addition, the accrued interest on the
Notes totaled $742,424. The conversion prices for the Notes were set at the time
of their initial issuance.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "Warrants"), which Warrants
are exercisable at a price of $2.76 per share. 1.5 million of the Warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the Warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission.
29
In connection with the conversion, we also entered into a Registration Rights
Agreement with the holders of the Notes providing the holders with certain
registration rights under the Securities Act of 1933, as amended, with respect
to the common stock issuable upon exercise of the Warrants.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF
00-21"), "Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how
to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are separate units of accounting. The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal periods beginning after June 15,
2003 with early adoption permitted. Additionally, companies will be permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." Upon adoption of EIFT 00-21, there was no effect on
its financial position, cash flows or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities." Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46R requires a variable interest entity, as
defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN46R were deferred until the period ending after March 15, 2004.
The adoption of FIN 46R for provisions effective during 2003 has no impact on
the Company's financial position, cash flows or result of operations.
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
Upon adoption of SFAS No. 149, there was no effect on its financial position,
cash flows or results of operations.
On May 15, 2003, the FASB issued Statement No. 150 ("FAS No. 150"),
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. FAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). FAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments.
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; includes put options and
forward purchase contracts
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
FAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after
30
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Upon adoption of SFAS No. 150, there was
no effect on its financial position, cash flows or results of operations.
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the risks factors, any of which could have a material adverse
impact on our business, operating results and financial condition and result in
a complete loss of your investment.
RISKS RELATED TO OUR FINANCIAL RESULTS
IF WE DO NOT OBTAIN ADDITIONAL CASH TO OPERATE OUR BUSINESS, WE MAY NOT BE
ABLE TO EXECUTE OUR BUSINESS PLAN AND MAY NOT ACHIEVE PROFITABILITY
In the event that cash flow from operations is less than anticipated and we are
unable to secure additional funding to cover our expenses, in order to preserve
cash, we would be required to further reduce expenditures and effect further
reductions in our corporate infrastructure, either of which could have a
material adverse effect on our ability to continue our current level of
operations. To the extent that operating expenses increase or we need additional
funds to make acquisitions, develop new technologies or acquire strategic
assets, the need for additional funding may be accelerated and there can be no
assurances that any such additional funding can be obtained on terms acceptable
to us, if at all. If we are not able to generate sufficient capital, either from
operations or through additional debt or equity financing, to fund our current
operations, we will be forced to significantly reduce or delay our plans for
continued research and development and expansion. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
WE MAY NOT BE ABLE TO SATISFY THE AMERICAN STOCK EXCHANGE'S CONTINUED LISTING
REQUIREMENTS.
The AMEX staff notified us in June 2003 that we have fallen below Section
1003(a)(i) of the AMEX Company Guide for having shareholders' equity of less
than $2,000,000 and losses from continuing operations and/or net losses in two
out of the three most recent fiscal years. We were afforded the opportunity to
submit a plan of compliance to the AMEX and presented a plan to the AMEX in July
2003. On September 9, 2003, we received notice from the staff of the AMEX that
the AMEX had accepted our plan to regain compliance with AMEX's continued
listing standards and granted us an extension until December 4, 2004 to regain
compliance with those standards. The failure to execute our plan and comply with
the AMEX equity requirement could result in a delisting of our common stock. As
a result of our March 2004 debt conversion, we now meet the AMEX shareholder
equity requirement and we plan to request removal of this issue.
We will be subject to periodic review by the AMEX staff during the
extension period. During this time, we must make progress consistent with the
terms of the plan or maintain compliance with the continued listing standards.
Other as yet unidentified issues may arise that could adversely affect the
financial or the potential listing status of the company.
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION AND MAY INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
Accumulated losses excluding non-cash transactions as of December 31, 2003,
were $34.4 million and acquisition related non-cash transactions were $101.9
million, which resulted in an accumulated net loss of $136.3 million, the
majority of which was related to the March 2000 merger and the subsequent
write-down of our goodwill. The non-cash losses were dominated by the
amortization and write-down of goodwill and purchased intangibles and write-down
of acquired in process research and development related to the March 2000
acquisition, and also included some non-cash stock-based compensation. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund operating and
capital expenditures in areas such as establishment and expansion of markets,
sales and marketing, operating equipment and
31
research and development. We cannot assure investors that we will ever achieve
or sustain profitability or that our operating losses will not increase in the
future.
WE WERE PREVIOUSLY PRIMARILY DEPENDENT ON U.S. GOVERNMENT CONTRACTS.
The majority of our revenues to date have been derived from research and
development contracts with the U.S. federal government. We cannot continue to
rely on such contracts for revenue. We plan to submit proposals for additional
development contract funding; however, funding is subject to legislative
authorization and even if funds are appropriated such funds may be withdrawn
based on changes in government priorities. No assurances can be given that we
will be successful in obtaining new government contracts. Our inability to
obtain revenues from government contracts could have a material adverse effect
on our results of long-term operations, unless substantial product or
non-government contract revenue offsets any lack of government contract revenue.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
We rely on our license agreement with Eastman Kodak for the development of
our products, and the termination of this license, Eastman Kodak's licensing of
its OLED technology to others for microdisplay applications, or the sublicensing
by Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business.
Our principal products under development utilize OLED technology that we
license from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce
key patents held by Eastman Kodak, relating to OLED display technology. Eastman
Kodak's patents expire at various times in the future. Our license with Eastman
Kodak could terminate if we fail to perform any material term or covenant under
the license agreement. Since our license from Eastman Kodak is non-exclusive,
Eastman Kodak could also elect to become a competitor itself or to license OLED
technology for microdisplay applications to others who have the potential to
compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.
We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to properly protect our position or stay
ahead of competition in new research and the protecting of the resulting
intellectual property.
RISKS RELATED TO THE MICRODISPLAY INDUSTRY
THE COMMERCIAL SUCCESS OF THE MICRODISPLAY INDUSTRY DEPENDS ON THE WIDESPREAD
MARKET ACCEPTANCE OF MICRODISPLAY SYSTEMS PRODUCTS.
The market for microdisplays is emerging. Our success will depend on
consumer acceptance of microdisplays as well as the success of the
commercialization of the microdisplay market. As an OEM supplier, our customer's
products must also be well accepted. At present, it is difficult to assess or
predict with any assurance the
32
potential size, timing and viability of market opportunities for our technology
in this market. The viewfinder microdisplay market sector is well established
with entrenched competitors with whom we must compete.
THE MICRODISPLAY SYSTEMS BUSINESS IS INTENSELY COMPETITIVE.
We do business in intensely competitive markets that are characterized by
rapid technological change, changes in market requirements and competition from
both other suppliers and our potential OEM customers. Such markets are typically
characterized by price erosion. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Our ability to
compete successfully will depend on a number of factors, both within and outside
our control. We expect these factors to include the following:
o our success in designing, manufacturing and delivering expected new
products, including those implementing new technologies on a timely
basis;
o our ability to address the needs of our customers and the quality of
our customer services;
o the quality, performance, reliability, features, ease of use and
pricing of our products;
o successful expansion of our manufacturing capabilities;
o our efficiency of production, and ability to manufacture and ship
products on time;
o the rate at which original equipment manufacturing customers
incorporate our product solutions into their own products;
o the market acceptance of our customers' products; and
o product or technology introductions by our competitors.
Our competitive position could be damaged if one or more potential OEM
customers decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
THE DISPLAY INDUSTRY IS CYCLICAL.
The display industry is characterized by fabrication facilities that
require large capital expenditures and long lead times for supplies and the
subsequent processing time, leading to frequent mismatches between supply and
demand. The OLED microdisplay sector may experience overcapacity if and when all
of the facilities presently in the planning stage come on line leading to a
difficult market in which to sell our products.
COMPETING PRODUCTS MAY GET TO MARKET SOONER THAN OURS.
Our competitors are investing substantial resources in the development and
manufacture of microdisplay systems using alternative technologies such as
reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
microdisplays, active matrix electroluminescence and scanning image systems, and
transmissive active matrix LCDs.
OUR COMPETITORS HAVE MANY ADVANTAGES OVER US.
As the microdisplay market develops, we expect to experience intense
competition from numerous domestic and foreign companies including
well-established corporations possessing worldwide manufacturing and production
facilities, greater name recognition, larger retail bases and significantly
greater financial, technical, and marketing resources than us, as well as from
emerging companies attempting to obtain a share of the various markets in which
our microdisplay products have the potential to compete.
33
OUR PRODUCTS ARE SUBJECT TO LENGTHY OEM DEVELOPMENT PERIODS.
We plan to sell most of our microdisplays to OEMs who will incorporate them
into products they sell. OEMs determine during their product development phase
whether they will incorporate our products. The time elapsed between initial
sampling of our products by OEMs, the custom design of our products to meet
specific OEM product requirements, and the ultimate incorporation of our
products into OEM consumer products is significant. If our products fail to meet
our OEM customers' cost, performance or technical requirements or if unexpected
technical challenges arise in the integration of our products into OEM consumer
products, our operating results could be significantly and adversely affected.
Long delays in achieving customer qualification and incorporation of our
products could adversely affect our business.
OUR PRODUCTS WILL LIKELY EXPERIENCE RAPIDLY DECLINING UNIT PRICES.
In the markets in which we expect to compete, prices of established
products tend to decline significantly over time. In order to maintain our
profit margins over the long term, we believe that we will need to continuously
develop product enhancements and new technologies that will either slow price
declines of our products or reduce the cost of producing and delivering our
products. While we anticipate many opportunities to reduce production costs over
time, there can be no assurance that these cost reduction plans will be
successful nor is there any assurance that our costs can be reduced as quickly
as any reduction in unit prices. We may also attempt to offset the anticipated
decrease in our average selling price by introducing new products, increasing
our sales volumes or adjusting our product mix. If we fail to do so, our results
of operations would be materially and adversely affected
RISKS RELATED TO MANUFACTURING
WE EXPECT TO DEPEND ON SEMICONDUCTOR CONTRACT MANUFACTURERS TO SUPPLY OUR
SILICON INTEGRATED CIRCUITS AND OTHER SUPPLIERS OF KEY COMPONENTS, MATERIALS AND
SERVICES.
We do not manufacture the silicon integrated circuits on which we
incorporate our OLED technology. Instead, we expect to provide the design
layouts to semiconductor contract manufacturers who will manufacture the
integrated circuits on silicon wafers. We also expect to depend on suppliers of
a variety of other components and services, including circuit boards, graphic
integrated circuits, passive components, materials and chemicals, and equipment
support. Our inability to obtain sufficient quantities of high quality silicon
integrated circuits or other necessary components, materials or services on a
timely basis could result in manufacturing delays, increased costs and
ultimately in reduced or delayed sales or lost orders which could materially and
adversely affect our operating results.
THE MANUFACTURE OF OLED-ON-SILICON IS NEW AND OLED MICRODISPLAYS HAVE NOT BEEN
PRODUCED IN SIGNIFICANT QUANTITIES.
If we are unable to produce our products in sufficient quantity, we will be
unable to attract customers. In addition, we cannot assure you that once we
commence volume production we will attain yields at high throughput that will
result in profitable gross margins or that we will not experience manufacturing
problems which could result in delays in delivery of orders or product
introductions.
WE ARE DEPENDENT ON A SINGLE MANUFACTURING LINE.
We initially expect to manufacture our products on a single manufacturing
line. If we experience any significant disruption in the operation of our
manufacturing facility or a serious failure of a critical piece of equipment, we
may be unable to supply microdisplays to our customers. For this reason, some
OEMs may also be reluctant to commit a broad line of products to our
microdisplays without a second production facility in place. Interruptions in
our manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to
34
meet the requirements of certain OEMs for multiple manufacturing sites, we will
have to expend capital to secure additional sites and may not be able to manage
multiple sites successfully.
RISKS RELATED TO OUR BUSINESS
OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING HIGHLY SKILLED AND QUALIFIED
TECHNICAL AND CONSULTING PERSONNEL.
We must hire highly skilled technical personnel as employees and as
independent contractors in order to develop our products. The competition for
skilled technical employees is intense and we may not be able to retain or
recruit such personnel. We must compete with companies that possess greater
financial and other resources than we do, and that may be more attractive to
potential employees and contractors. To be competitive, we may have to increase
the compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a materially adverse affect on our business
and our operating results. In addition, difficulties in hiring and retaining
technical personnel could delay the implementation of our business plan.
OUR SUCCESS DEPENDS IN A LARGE PART ON THE CONTINUING SERVICE OF KEY PERSONNEL.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel,
including Gary W. Jones, our chief executive officer. This is especially an
issue while the company staffing is small. We will also need to recruit
additional management in order to expand according to our business plan. We are
currently recruiting a chief financial officer. The failure to attract and
retain additional management or personnel could have a material adverse effect
on our operating results and financial performance.
OUR BUSINESS DEPENDS ON NEW PRODUCTS AND TECHNOLOGIES.
The market for our products is characterized by rapid changes in product,
design and manufacturing process technologies. Our success depends to a large
extent on our ability to develop and manufacture new products and technologies
to match the varying requirements of different customers in order to establish a
competitive position and become profitable. Furthermore, we must adopt our
products and processes to technological changes and emerging industry standards
and practices on a cost-effective and timely basis. Our failure to accomplish
any of the above could harm our business and operating results.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Our business is operated on the basis of short-term purchase orders and we
cannot guarantee that we will be able to obtain long-term contracts for some
time. Our current purchase agreements can be cancelled or revised without
penalty, depending on the circumstances. In the absence of a backlog of orders
that can only be canceled with penalty, we plan production on the basis of
internally generated forecasts of demand, which makes it difficult to accurately
forecast revenues. If we fail to accurately forecast operating results, our
business may suffer and the value of your investment in the Company may decline.
OUR BUSINESS STRATEGY MAY FAIL IF WE CANNOT CONTINUE TO FORM STRATEGIC
RELATIONSHIPS WITH COMPANIES THAT MANUFACTURE AND USE PRODUCTS THAT COULD
INCORPORATE OUR OLED-ON-SILICON TECHNOLOGY.
Our prospects will be significantly affected by our ability to develop
strategic alliances with OEMs for incorporation of our OLED-on-silicon
technology into their products. While we intend to continue to establish
strategic relationships with manufacturers of electronic consumer products,
personal computers, chipmakers, lens makers, equipment makers, material
suppliers and/or systems assemblers, there is no assurance that we will be able
to continue to establish and maintain strategic relationships on commercially
acceptable terms, or that the alliances we do enter in to will realize their
objectives. Failure to do so would have a material adverse effect on our
business.
OUR BUSINESS DEPENDS TO SOME EXTENT ON INTERNATIONAL TRANSACTIONS.
35
We purchase needed materials from companies located abroad and may be
adversely affected by political and currency risk, as well as the additional
costs of doing business with a foreign entity. Some customers in other countries
have longer receivable periods or warranty periods. In addition, many of the
OEMs that are the most likely long-term purchasers of our microdisplays are
located abroad exposing us to additional political and currency risk. We may
find it necessary to locate manufacturing facilities abroad to be closer to our
customers which could give expose us to various risks, including management of a
multi-national organization, the complexities of complying with foreign laws and
customs, political instability and the complexities of taxation in multiple
jurisdictions.
OUR BUSINESS MAY EXPOSE US TO PRODUCT LIABILITY CLAIMS.
Our business may expose us to potential product liability claims. Although
no such claims have been brought against us to date, and to our knowledge no
such claim is threatened or likely, we may face liability to product users for
damages resulting from the faulty design or manufacture of our products. While
we plan to maintain product liability insurance coverage, there can be no
assurance that product liability claims will not exceed coverage limits, fall
outside the scope of such coverage, or that such insurance will continue to be
available at commercially reasonable rates, if at all.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS AND POSSIBLE LIABILITY
ARISING FROM POTENTIAL EMPLOYEE CLAIMS OF EXPOSURE TO HARMFUL SUBSTANCES USED IN
THE DEVELOPMENT AND MANUFACTURE OF OUR PRODUCTS.
We are subject to various governmental regulations related to toxic,
volatile, experimental and other hazardous chemicals used in our design and
manufacturing process. Our failure to comply with these regulations could result
in the imposition of fines or in the suspension or cessation of our operations.
Compliance with these regulations could require us to acquire costly equipment
or to incur other significant expenses. We develop, evaluate and utilize new
chemical compounds in the manufacture of our products. While we attempt to
ensure that our employees are protected from exposure to hazardous materials, we
cannot assure you that potentially harmful exposure will not occur or that we
will not be liable to employees as a result.
RISKS RELATED TO OUR STOCK
THE SUBSTANTIAL NUMBER OF SHARES THAT ARE OR WILL BE ELIGIBLE FOR SALE COULD
CAUSE OUR COMMON STOCK PRICE TO DECLINE EVEN IF THE COMPANY IS SUCCESSFUL.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of March 30, 2004, we have outstanding (i) options to
purchase 7,242,824 shares; (ii) warrants to purchase 16,178,411 shares of common
stock; and (iii) 0 shares of common stock underlying convertible securities.
WE HAVE A STAGGERED BOARD OF DIRECTORS AND OTHER ANTI-TAKEOVER PROVISIONS, WHICH
COULD INHIBIT POTENTIAL INVESTORS OR DELAY OR PREVENT A CHANGE OF CONTROL THAT
MAY FAVOR YOU.
Our Board of Directors is divided into three classes and our Board members
are elected for terms that are staggered. This could discourage the efforts by
others to obtain control of the company. Some of the provisions of our
certificate of incorporation, our bylaws and Delaware law could, together or
separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
36
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT INDEX
Page
Independent auditor's report...........................................................................F-2
Independent auditor's report...........................................................................F-3
Consolidated Balance Sheet as of December 31, 2003.....................................................F-4
Consolidated Statement of Operations for the years ended December 31, 2003 and 2002....................F-5
Consolidated Statements of Capital Deficiency for the years ended December 31,
2003 and 2002....................................................................................F-6
Consolidated Statement of Cash Flows for the years ended December 31, 2003 and 2002....................F-7
Notes to the Consolidated Financial Statements.........................................................F-8
37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
eMagin Corporation
Hopewell Junction, New York
We have audited the accompanying consolidated balance sheet of eMagin
Corporation and subsidiary (the "Company") as of December 31, 2003, and the
related consolidated statements of operations, capital deficiency and cash flows
for the year then ended. 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 conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of eMagin Corporation
and subsidiary as of December 31, 2003 and the consolidated results of their
operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/
Eisner LLP
New York, New York
February 13, 2004
With respect to Notes F(b) and O
March 3, 2004
38
INDEPENDENT AUDITORS' REPORT
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit) and cash flows of eMagin Corporation and
subsidiaries for the year ended December 31, 2002. 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 conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of eMagin
Corporation and subsidiaries in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 of the
consolidated financial statements on Form 10-K for the year ended December 31,
2002, the Company's recurring losses from operations since inception and the
working capital deficit raised substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters were also
described in Note 1 of the consolidated financial statements on Form 10-K for
the year ended December 31, 2002. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
----------------------
Grant Thornton LLP
New York, New York
April 11, 2003
39
eMagin Corporation
Consolidated Balance Sheet
December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 1,053,895
Trade and contract receivables 768,537
Unbilled costs and estimated profits on contracts in progress 75,359
Prepaid expenses and other current assets 287,957
Inventory 275,417
-----------------------
Total current assets 2,461,165
Equipment and leasehold improvements, net of accumulated depreciation of $2,149,991 1,200,939
Other long-term assets 86,907
-----------------------
Total assets $ 3,749,011
=======================
LIABILITIES
Current liabilities:
Accounts payable $ 234,869
Accrued payroll and benefits 952,850
Other accrued expenses, net dividends 988,569
Advanced payments 122,362
Current portion of long-term debt 38,184
Other current liabilities 18,008
-----------------------
Total current liabilities 2,354,842
Capitalized lease obligations 36,257
Notes payable and short-term debt subsequently converted to equity 6,124,451
-----------------------
Total liabilities 8,515,550
-----------------------
Commitments and contingencies
CAPITAL DEFICIENCY
Preferred Stock - authorized: 10,000,000 shares, none issued -
Common Stock - $.001 par value, authorized 200,000,000 shares,
Issued and outstanding 42,695,412 shares 42,694
Paid-in surplus 131,598,910
Deferred compensation (87,565)
Accumulated deficit (136,320,578)
-----------------------
Total capital deficiency (4,766,539)
-----------------------
Total liabilities and capital deficiency $ 3,749,011
=======================
See notes to consolidated financial statements
40
eMagin Corporation
Consolidated Statements of Operations
Year Ended December 31,
2003 2002
------------------- ----------------
Revenue:
Product revenue $ 2,213,290 $ 1,314,193
Contract revenue 364,809 840,658
Sales returns and allowances - (27,191)
------------------- ----------------
Total Revenue 2,578,099 2,127,660
Cost of goods sold:
Costs of goods sold 5,141,448 -
------------------- ----------------
Gross (loss) profit (2,563,349) 2,127,660
------------------- ----------------
Costs and expenses:
Research and development, net of funding under cost
sharing arrangements of $0 and $331,956,
respectively 18,810 7,254,996
Amortization of purchased intangibles 331,442 1,325,796
Stock based compensation 2,183,418 1,646,917
Selling, general and administrative 3,197,605 4,506,321
------------------- ----------------
Total costs and expenses, net 5,731,275 14,734,030
------------------- ----------------
Other income (expense):
Gain on on debt settlement 4,637,993 -
Interest expense (1,283,254) (2,329,452)
Other income (expense), net 216,570 23,111
------------------- ----------------
Other income (expense) 3,571,309 (2,306,341)
------------------- ----------------
Net loss $ (4,723,315) $ (14,912,711)
=================== ================
Basic and diluted loss per common share $ (0.13) $ (0.51)
=================== ================
Weighted average outstanding common stock 35,998,435 29,416,838
=================== ================
See notes to consolidated financial statements
41
eMagin Corporation
Consolidated Statements of Capital Deficiency
----------------------------------------------------------------------------------
Common Common Deferred Paid-in Accumulated Total
Shares Stock Compensation Surplus Deficit
----------------------------------------------------------------------------------
Balance - December 31, 2001 25,171,183 $ 25,171 $(2,277,367) $ 114,058,560 $(116,684,552) $ (4,878,188)
-------------- --------- ------------ -------------- --------------- -------------
Shares issued for financing
round 4,899,179 4,899 3,475,619 3,480,518
Buyout of debt financing 500,000 500 89,632 90,132
Warrants issued 140,387 140,387
Stock issued for consideration 80,000 80 55,570 55,650
Stock options exercised 2,125 2 885 887
Stock options issued 35,329 35,329
Options forfeited 1,075,193 (1,075,193) -
Finders fee on financing (35,000) (35,000)
Beneficial conversion on
financing 783,691 783,691
Original issue discount on
financing 672,682 672,682
Issuance of common stock for
services 202,493 202 146,716 146,918
Amortization of deferred
compensation 739,191 739,191
Stock based compensation 872,399 872,399
Net loss for period (14,912,711) (14,912,711)
-------------- --------- ------------ -------------- --------------- -------------
Balance - December 31, 2002 30,854,980 30,854 (462,983) 119,221,276 (131,597,263) (12,808,115)
Conversion of debt to equity 6,101,972 6,102 - 4,447,996 - 4,454,098
Debt settlement 1,997,840 1,998 - 1,409,971 - 1,411,969
Exercise of warrants 1,479,900 1,480 - 1,136,595 - 1,138,075
Cashless exercise of warrants 270,910 271 - (271) - -
Original issue discount on
financing - - - 1,383,203 - 1,383,203
Beneficial conversion on
financing - - - 616,797 - 616,797
Stock issued for services 656,435 656 - 561,302 - 561,958
Options exercised 846,793 847 - 279,199 - 280,046
Issuance of equity for interest
and penalties 486,582 486 - 734,841 - 735,327
Amortization of deferred
compensation - - 375,418 - - 375,418
Stock option compensation - - - 1,808,000 - 1,808,000
Net loss for period - - - - (4,723,315) (4,723,315)
-------------- --------- ------------ -------------- --------------- -------------
Balance - December 31, 2003 42,695,412 $ 42,694 $ (87,565) $ 131,598,910 $ (136,320,578) $(4,766,539)
============== ========= ============ ============== =============== =============
See notes to consolidated financial statements
42
eMagin Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
2003 2002
--------------------- --------------------
Cash flows from operating activities:
Net loss $ (4,723,315) $(14,912,711)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 552,849 1,842,480
Amortization of purchased intangibles 331,442 -
Amortization of financing fees 37,244 -
Debt discount amortization and charge for beneficial conversion
feature 340,466 783,692
Stock based compensation 2,183,418 1,646,917
Interest related charges 915,325 1,446,654
Related to issuance of warrants - 140,387
Gain on debt settlement (4,637,993) -
Stock issued for services 561,958 25,050
Changes in: - -
Trade receivables (528,401) 593,300
Unbilled costs and estimated profits on contracts in progress 50,000 125,359
Costs and estimated profits in excess of billings on contracts - (326,291)
Inventory (24,419) 341,718
Prepaid expenses and other current assets (276,109) 196,371
Other long-term assets 112,500 139,033
Advanced payments 122,362 (398,343)
Deferred revenue (30,400) 30,400
Accounts payable, accrued expenses and accrued payroll (185,776) 2,738,847
Other current liabilities (5,497) -
--------------------- --------------------
Net cash used in operating activities (5,204,346) (5,587,137)
--------------------- --------------------
Cash flows from investing activities:
Purchase of equipment (1,120,256) (84,745)
Cash flows from financing activities:
Proceeds from sales of common stock, net of issuance costs - 3,475,621
Proceeds from exercise of stock options and warrants 1,418,121 141,272
Proceeds from long- and short-term debt 6,000,000 1,443,478
Payments of long- and short-term debt (122,775) (43,880)
--------------------- --------------------
Net cash provided by financing activities 7,295,346 5,016,491
--------------------- --------------------
Net increase (decrease) in cash and cash equivalents 970,944 (655,391)
Cash and cash equivalents - beginning of year 82,951 738,342
--------------------- --------------------
Cash and cash equivalents - end of year $ 1,053,895 $ 82,951
===================== ====================
Cash paid for interest $ 15,649
Non-cash transactions:
Conversion of debt to equity $ 4,454,098
Issuance of equity for penalties and interest $ 735,327
Issuance of equity for settlement of accounts payable $ 1,411,969
See notes to consolidated financial statements
43
eMAGIN CORPORATION
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Note A - NATURE OF BUSINESS
Fashion Dynamics Corporation ("FDC") was organized on January 23, 1996, under
the laws of the State of Nevada. FDC had no active business operations other
than to acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the "Merger"). The merged company changed its name to
eMagin Corporation (the "Company" or "eMagin"). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
Through December 31, 2002, the Company was considered a development stage
enterprise, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises". As
of January 1, 2003, the Company has commenced planned principal operations and
as such it is no longer considered to be a development stage enterprise in
accordance with SFAS No 7. In accordance with SFAS No.7, the 2002 financial
statements have been restated to give effect to the Company exiting the
development stage.
Note B - SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The accompanying consolidated financial statements of eMagin Corporation include
the assets, liabilities, revenues and expenses of its wholly owned subsidiary.
Inter-company transactions and balances are eliminated in consolidation.
[2] Revenue and cost recognition:
Revenue is recognized when products are shipped to customers, net of allowances
for anticipated returns. The Company's revenue-earning activities generally
involve delivering products and revenues are considered to be earned when the
Company has completed the process by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, selling price is fixed or determinable and collection is
reasonably assured.
The Company also earns revenues from certain of eMagin's R&D activities under
both firm fixed-price contracts and cost-type contracts, including some
cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts
include costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can be billed on a bi-monthly basis. Billing is based on subjective cost
investment factors.
[3] Research and development costs:
R&D costs are expensed as incurred. To date, activities of the Company have
included the performance of R&D under cooperative agreements with United States
Government agencies. Funding from such R&D contracts is
44
recognized as a reduction in operating expenses during the period in which the
services are performed and related direct expenses are incurred.
The Company has incurred research and development costs and earned funding under
these agreements during the year ended December 31, 2003 as follows:
Unfunded research and development $ 7,244,820
Research and development costs 331,956
Funding received (331,956)
[4] Cash and cash equivalents:
We consider all highly liquid instruments with an original maturity of three
months or less at the date of purchase to be cash equivalents.
[5] Accounts receivable:
The majority our commercial accounts receivable are due from Original Equipment
Manufacturers ("OEM"s). Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are payable in U.S. dollars, are due within 30-90 days and are stated
at amounts due from customers net of an allowance for doubtful accounts. Any
account outstanding longer than the contractual payment terms is considered past
due. The Company determines the allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, eMagin's
previous loss history, the customer's current ability to pay its obligation, and
the condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectable, and payments
subsequently received on such receivables are reported as income in the year the
payment is received
[6] Inventory:
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realized value based upon current market
prices and contracts for future sales.
[7] Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over
its estimated useful life. Amortization of leasehold improvements is
calculated by using the straight-line method over the shorter of their estimated
useful lives or lease terms. Expenditures for maintenance and repairs are
charged to expense as incurred.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," eMagin performs impairment tests on its long-lived assets,
when circumstances indicate that their carrying amounts may not be recoverable.
If required, recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its carrying value.
Impairment losses, if any, are recognized based on the excess of the assets'
carrying amounts over their fair values.
[8] Income taxes:
Deferred income taxes are recorded by applying enacted statutory tax rates to
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. At December 31, 2003 and 2002, the
Company has net deferred tax assets of approximately $56.7 million and $29.5
million, respectively, primarily resulting from the future tax benefit of net
operating loss carryforwards discussed below and timing differences relating to
amortization of goodwill and other intangible assets. Such net deferred tax
assets are fully offset by valuation allowances due to the uncertainty as to
their realizability.
At December 31, 2003, the Company has net operating loss carryforwards totaling
approximately $ 86.4 million, inclusive of the net operating losses acquired as
part of the acquisition of FED, which expire through 2023, available to offset
future federal taxable income. Pursuant to Section 382 of the Internal Revenue
Code, the usage of a portion of these net operating loss carryforwards is
limited due to changes in ownership that have occurred.
[9] Loss per common share:
In accordance with SFAS No. 128, "Earnings Per Share," net loss per common share
amounts ("basic EPS") were computed by dividing net loss by the weighted average
number of common shares outstanding and excluding any potential dilution. Net
loss per common share amounts assuming dilution ("diluted EPS") were computed by
45
reflecting potential dilution from the exercise of stock options and warrants.
Common equivalent shares have been excluded from the computation of diluted EPS
for all periods presented as their effect is antidilutive. The Company's
computation of dilutive loss per share for the year ended December 31, 2003 does
not include options and warrants to purchase 21,725,607 common shares, as their
effect would be antidilutive.
[10] Comprehensive income (loss):
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity (or other comprehensive income (loss) such as
unrealized gains or losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income (loss) must be reported on the face of the
annual financial statements. The Company's operations did not give rise to any
material items includable in comprehensive income (loss), which were not already
in net income (loss) for the years ended December 31, 2003 and 2002.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (loss) for all periods presented.
[11] Stock-based compensation:
eMagin applies Accounting Principals Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, eMagin records expense for employee
stock compensation plans equal to the excess of the market price of the
underlying eMagin shares at the date of grant over the exercise price.
As of December 31, 2003, the Company has outstanding options to purchase
12,148,570 shares. The Company has elected to follow APB No. 25, in accounting
for its employee stock options. Under APB No. 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant no compensation expense is recorded. The Company discloses
information relating to the fair value of stock-based compensation awards in
accordance with Statement of Financial Accounting Standards No.123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." The following table
illustrates the effect on net loss and loss per share as if the Company had
applied the fair value recognition provision of SFAS No. 123. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in 2003 and
2002, respectively: (1) average expected volatility of 100% and 150%, (2)
average risk-free interest rates of 3.52% and 6.00%, and (3) expected lives of
7-10 years and 5-8 years and (4) dividends of 0% and 0%.
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair values of awards that were earned during the
years ended December 31, 2003 and 2002.
2003 2002
-------------------
(in thousands)
Net loss applicable to common stockholders, as reported $ (4,723) $ (14,913)
Stock-based employee compensation expense included in reported net loss 2,183 -
Stock-based employee compensation expense determined under fair value method (3,748) (1,226)
---------- ----------
Pro forma net loss $ (6,288) $ (16,139)
========== ==========
Net loss per share:
Basic and diluted, as reported $ (0.13) $ (0.51)
Basic and diluted, pro forma $ (0.17) $ (0.55)
Weighted average fair value per option $ 0.76 $ 0.74
46
[12] Fair value of financial instruments:
The Company has various financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable and short and capitalized lease
obligations. The Company believes the carrying values of its financial
instruments approximate their fair values. The carrying amount of the short- and
long-term debt approximates fair value at December 31, 2003 based on interest
rates available to the Company and debt instruments with similar terms.
[13] Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates and assumptions relate to recording net revenue,
collectibility of accounts receivable, and the realizability of other intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates;
however, actual results could differ from these estimates. Consequently, change
in conditions could affect eMagin's estimates.
[14] Reclassifications:
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
Note C - RECEIVABLES
Receivables at December 31, 2003 consist of the following:
Trade receivables $ 899,174
Contract receivables 173,809
Unbilled receivables 75,359
------------
Total 1,148,342
Less allowance for doubtful accounts (304,446)
------------
Net receivables $ 843,896
============
Note D - Inventory
The components of inventories as of December 31, 2003 are as follows:
Raw materials $ 20,416
Work in process 43,750
Finished goods 211,251
-----------
Total Inventory $ 275,417
===========
Note E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2003:
Useful
Lives
Computer hardware and software 3 $ 328,758
Lab and factory equipment 3 2,547,165
Furniture, fixtures and office equipment 10 145,268
Leasehold improvements (a) 329,739
------------
Total Fixed Assets 3,350,930
Less accumulated depreciation (2,149,991)
------------
Total Net Book Value $ 1,200,939
============
(a) The shorter of either the life of the lease, or the useful life
47
Note F - DEBT
The debt consisted of the following as of December 31, 2003:
a Current portion of long term debt $ 38,184
b Restructuring Agreement 4,456,973
c Original Secured Notes 1,667,478
d Capitalized lease obligations 36,257
-------------------
e Total debt $ 6,198,892
===================
(a) This amount includes (i) $12,213 due to Citicorp Leasing over the next 12
months in lease payments for equipment; and (ii) $25,971 due to IBM over the
next 12 months for leasehold improvements. The remaining balance under the
Citicorp lease is due in 2005.
(b) On April 25, 2003, eMagin entered into a Global Restructuring and Secured
Note Purchase Agreement ("Restructuring Agreement") dated as of April 25, 2003
(the "Closing Date") with a group of several accredited institutional and
individual investors whereby the investors agreed to lend the Company $6,000,000
in exchange for (i) the issuance of $6,000,000 principal amount of 9% secured
convertible promissory notes due and payable on November 1, 2005 and (ii)
warrants to purchase an aggregate of 7,749,921 shares of common stock of eMagin
(subject to certain customary anti-dilution adjustments). Such warrants are
exercisable for a period of three (3) years from the issue date.
Interest is payable on the notes at a rate of 9% per annum and, at the Company's
option, may be paid through the delivery of shares of the Company's common stock
in lieu of cash interest payments on the maturity date of the loan, November 1,
2005. Subject to certain limitations, the notes may be converted, at the option
of the holder, in whole or in part, into common shares with a conversion price
of $0.7742, an amount equal to 105% of the volume weighted average of the
closing price of eMagin's common shares as reported on The American Stock
Exchange by the Wall Street Journal, New York City edition, for the five (5)
trading days immediately preceding the closing date. The exercise price of the
warrants on a per share basis is $.8110, an amount equal to 110% of the volume
weighted average of eMagin's closing price of our common shares as reported on
The American Stock Exchange by the Wall Street Journal, New York City edition,
for the five (5) trading days immediately preceding the closing date.
As of December 31, 2003 the Company had received the entire $6,000,000. The
Company recorded $1,289,575 for the debt discount and $510,425 for the
beneficial conversion as paid-in surplus, which is being amortized through
November 1, 2005. For the year ended December 31, 2003, $256,973 was amortized
to interest expense.
The terms of the notes contain certain revisions, including financial and other
covenants, which covenants relate to expenses, direct cost of goods sold,
revenues and quarterly revenues. In the event that the Company is not in
compliance with these covenants, 50% or more of the holders of the notes (in
terms of the aggregate dollar value of the principal of the notes then issued
and outstanding under the note purchase agreement) would be able to call an
event of default. As of December 31, 2003, the Company was in violation of
certain financial covenants. The notes have not been included in current
liabilities because they were converted into shares of the Company's common
stock on March 3, 2004 (see Note O).
48
(c)This amount includes secured convertible loans aggregating $1,625,000 issued
under the secured note purchase agreements executed from November 27, 2001
through January 14, 2002 ("Original Secured Notes"). The Original Secured Notes
accrue interest at a rate of 9.00% per annum and were due on June 30, 2003.
Terms of the notes issued included a fixed conversion into the Company's shares
of common stock at the rate of $0.5264 per share. The Company also granted
warrants purchasing 921,161 shares of common stock with an exercise price of
$0.5468 per share to the note holders. Such warrants are exercisable through
January 2005.
The total of the intrinsic value of the warrants issued to the note holders and
the incremental intrinsic value of the repriced warrants of certain existing
note holders of approximately $480,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the original
period of the debt.
In addition, based on the terms of the Original Secured Notes, the conversion
terms of the debt provide for a beneficial conversion feature. The total value
of the beneficial feature of the debt and the incremental value of the reset
conversion feature of the existing debt of approximately $780,000 was recorded
at January 14, 2002 as non-cash interest expense.
In connection with the April 2003 financing described above, the note holders
agreed to (a) amend the secured note issued to them, (b) terminate the security
agreement dated November 27, 2001 that was entered into in connection with the
purchase of the Original Secured Notes and allow the note holders to enter into
a new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the notes
included (i) extending the maturity dates of the note from June 30, 2003 to
November 1, 2005, and (ii) revising and clarifying certain of the other terms
and conditions of the note, including provisions relating to default and
assignment of the note.
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with an investor. The secured note accrues interest at 11% per annum
and was due to mature on June 30, 2003 and was amended as a result of the
financing the Company completed in April 2003. The Company also granted
warrants, exercisable for a period of five years, to purchase 300,000 shares of
common stock with an exercise price of $0.4257 per share to the investor,
provided, however, that this warrant may not be exercised by the investor so
long as the investor is the beneficial owner, directly or indirectly, of more
than ten percent (10%) of the common stock of eMagin for purposes of Section 16
of the Securities Exchange Act 1934. The fair value of the warrants issued to
this investor, which approximated $84,000, has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the period of
the debt. Pursuant to the April 2003 financing described above, the investor
agreed to (a) amend the secured note issued to them, (b) terminate the security
agreement dated June 20, 2002 that was entered into in connection with the
purchase of the Original Secured Notes and allow the investors to enter into a
new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the note
included (i) amending the note issued on June 20, 2002 so as to provide that the
note shall be convertible and will have the same conversion price as the notes
issued pursuant to the April 2003 secured note purchase agreement, (ii)
extending the maturity dates of the note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the note, including provisions relating to interest payments, conversions,
default and assignment of the note. Due to the amendment to a convertible note,
the Company recorded a $106,372 beneficial conversion discount and a $93,628
original debt discount, to be amortized through November 2005. For the year
ended December 31, 2003, the Company has amortized a total of $42,478 for
original debt discount and for beneficial conversion discount.
49
(d) This amount is due to Citicorp Leasing as long-term debt for lease payments
for equipment.
In September 2003, in accordance with the agreement, the Company was required to
convert two Series B Convertible Debentures in the amount of $121,739 each into
1,468,382 share of the Company's common stock at a conversion price from the
original note purchase agreement of $0.18 per share
Note G - DEBT SETTLEMENT
In connection with the April 2003 Financing, the Company entered into settlement
or restructuring agreements with certain of eMagin's other creditors, pursuant
to which the creditors agreed to accept shares of eMagin's common stock in full
or partial satisfaction of the amount owed to them, or which allow us to either
make discounted payments to them or to make payments under more favorable
payment terms than previously were in place.
The Company converted the $1,000,000 loan plus interest to Travelers Insurance
Company ("Travelers") into 2,137,757 shares of the Company's common shares at a
conversion price from the original agreement of approximately $0.53 per share,
based on the market value of eMagin's common stock on the date the Company
entered into the agreement. The Company also converted the $3,000,000 loan plus
interest to SK Corporation into 2,495,833 shares of the Company's common stock
at a conversion price from the original agreement of approximately $1.28 per
share, based on the market value of eMagin's common stock on the date the
Company entered into the agreement. There was no gain recorded on these
transactions.
During 2003, the Company issued 1,997,840 shares of common stock with a market
value of $1,411,969 in partial payment of accounts payable and debt which
resulted in a $1,575,087 gain on debt settlement.
In the third quarter of 2003, the Company exercised several lease buyout
provisions. The Company purchased for cash, $950,000 of equipment, which
resulted in a reduction of $598,493 in prepaid interest and a write-down of
$3,062,906 in long- and short-term debt.
As a result of the above transactions, the Company recorded $4,637,993 as a gain
on settlement of debt for the year ended December 31, 2003.
Note H - INCOME TAXES
The difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
2003
-----
U.S. Federal income tax provision (benefit)
at federal statutory rate (35)%
Change in valuation allowance 35 %
-----
0 %
=====
Significant components of eMagin's deferred tax assets as of December 31, 2003
are as follows:
Net operating losses $ 34,580,000
Goodwill and other intangibles 21,700,000
Allowance for doubtful accounts 121,778
Deferred payroll 195,010
Accrued vacation pay 70,401
--------------
Total 56,667,189
Less valuation allowance (56,667,189)
--------------
Net Deferred Tax Asset $ 0
==============
As of December 31, 2003, eMagin has federal and state net operating loss
carryforwards of approximately $86.4 million that will be available to offset
future taxable income, if any, through December 2023. The utilization of net
50
operating losses is subject to a substantial limitation due to the change of
ownership provisions under Section 382 of the Internal Revenue Code and similar
state provisions. Such limitation may result in the expiration of the net
operating losses before their utilization. A valuation allowance has been
established to reserve for the deferred tax assets arising from the net
operating losses and other temporary differences due to the uncertainty that
their benefit will be realized in the future.
In 2003, in connection with the restructuring of its indebtedness (see Note G),
the Company realized income of $4,637,993. Under Section 108 of the Internal
Revenue Code, this income is excludable for federal income tax purposes to the
extent that the amount of the Company's liabilities immediately before the
restructuring exceeds the fair market value of its assets as a going concern at
such time. The Company estimates the entire $4,637,993 is excludable under this
exception.
Pursuant to Section 108 of the Internal Revenue Code, the excluded income
reduces the Company's tax attributes as of January 1, 2004. Such reduction is
first applied to reduce net operating loss carryforwards.
Note I - STOCKHOLDERS' EQUITY
As of December 31, 2002, the authorized number of shares of common stock of the
Company consisted of 100,000,000 shares with a par value of $0.001 per share. On
July 2, 2003 the shareholders approved an increase to 200,000,000 shares.
In January 2002, the Company negotiated settlement of amounts due to a related
party for services previously rendered via issuance of 192,493 shares of common
stock. As such, the Company recorded the fair value of the shares of
approximately $135,000 in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
On February 27, 2002, the Company completed a private placement of securities
with several institutional and individual investors of 3,617,128 shares of
common stock at a price per share of $0.6913, generating gross proceeds of
approximately $2,500,000, less issuance costs of approximately $35,000. In
connection with the financing arrangement, the Company issued to the investors
warrants to purchase 1,446,852 shares of common stock of the Company at an
exercise price of $0.7542 per share. Also, the Company issued to an institution
warrants to purchase 36,164 shares of common stock in connection with a finder's
fee arrangement entered into between the two parties. Such warrants are
exercisable through February 2005. The Company entered into a registration
rights agreement providing for the registration of shares to be issued pursuant
to a conversion of the Original Secured Notes and the shares to be issued
pursuant to the exercise of the warrants issued thereunder. The Company was
currently in default of this filing requirement. As a result of the default, the
Company has accrued $87,362 in interest and penalties in 2002.
On March 4, 2002, the Company entered into an equity line of credit agreement
with a private equity fund (the "Fund") whereby the Company has the option, but
not the obligation, to sell shares of common stock to the Fund for a three-year
period at a price per share, as defined. The agreement provided for certain
minimum and maximum monthly amounts up to a maximum of $15 million and, in
certain circumstances, up to $20 million.
On March 4, 2002 the Company and the Fund entered into an agreement whereby the
Company issued 50,000 shares and the Fund agreed to extend the agreement. This
agreement was terminated in December 2002 whereby the investor retained its
warrants, the Company agreed to issue 500,000 shares of common stock and to pay
the sum of $25,000 upon the completion of specific financing.
In connection with the equity line of credit, the Company issued 30,000 shares
of common stock to the Fund as compensation for certain services rendered in
connection with the closing of the line of credit. As such, the Company recorded
the fair value of the shares of approximately $31,000 in selling, general and
administrative expenses for the year ended December 31, 2002. Also, the Company
granted warrants purchasing up to 150,000 shares of common stock of the Company
at an exercise price of $0.8731 per share. Such warrants are exercisable through
September 2005. The intrinsic value of said warrants of approximately $140,000
is included in selling, general and administrative expenses in the year ended
December 31, 2002.
In April 2002, the Company announced a strategic investment from ROHM Company
LTD ("Rohm"). ROHM purchased 1,282,051 shares of eMagin common stock at $0.78
per share as well as warrants to purchase an additional 512,820 shares of common
stock at a conversion price of $0.85 per share for an investment of $1,000,000.
The fair value of each warrant was estimated on the date of grant using the
Black-Scholes option-pricing model. Such warrants are exercisable through April
2005.
In 2002 the Company issued a third party 192,493 shares for consulting fees in
lieu of cash.
In April of 2003, the Company converted a $1,000,000 loan plus interest to
Travelers in common shares totaling 2,137,757 at a conversion price from the
original agreement of approximately $0.53 per share, based on the market value
of our common stock on the date the agreement was entered into (see Note G).
51
The Company also converted a $3,000,000 loan plus interest to SK Corporation in
common shares totaling 2,495,833 at a conversion price from the original
agreement of approximately $1.28 per share, based on the market value of our
common stock on the date the agreement was entered into (see Note G). New
paragraph
In September 2003, the Company converted two Series B Convertible Debentures in
the amount of $121,739 each into 1,468,382 share of the Company's common stock
at a conversion price from the original note purchase agreement of $0.18 per
share. This transaction included a write-down of the unamortized beneficial
conversion feature at the time of conversion.
In 2003, the Company received approximately $1.1 million for the exercise of
1,479,900 warrants to purchase shares of common stock. The Company also issued
270,910 common shares in cashless exercises of warrants in exchange for 579,329
warrant shares.
In 2003, the Company negotiated settlements of amounts due and amounts for
future services, rendered via issuance of 656,435 shares of common stock. As
such, the Company recorded the fair value of the services received and
receivable in the future of $561,958 in selling, general and administrative
expenses, prepaid expenses and reduction of accounts payable.
During 2003, the Company received $280,046 for the exercise of options to
purchase 846,793 shares of common stock.
The Company's April 25, 2003 Registration Rights Agreement, which was entered
into in connection with the Company's April 2003 financing, required the Company
to file a registration statement with the Securities and Exchange Commission no
later than 30 calendar days after the closing of the April 2003 financing. The
Company was not able to file the registration statement within the required
period and caused a default under the Registration Rights Agreement. As a result
of this default, the Company was required to issue an additional 486,582 common
shares for penalties and interest pursuant to the Registration Rights Agreement.
For the year ended December 31, 2003, the Company recorded a charge to earnings
of $735,324 for the penalties and interest. The Company filed its registration
statement in July of 2003.
In connection with the April 2003 financing, eMagin issued 387,496 warrants for
expenses related to the offering. These warrants were issued to Larkspur Capital
Corporation, a company in which one of the Company's directors is the managing
director.
Note J - STOCK COMPENSATION
[1] Stock option plans:
In 1994, the Company established the 1994 Stock Plan (the "1994 Plan"), which
has been assumed by eMagin. The plan provided for the granting of options to
purchase an aggregate of 1,286,000 shares of the common stock to employees and
consultants of FED.
In 2000, the Company established the 2000 Stock Option Plan (the "2000 Plan"),
which has been assumed by eMagin. On July 16, 2001, the shareholders approved an
increase in the aggregate number of shares of the Company's common stock
reserved for issuance under the 2000 Plan from 3,900,000 to 5,900,000 shares.
The Plan permits the granting of options and stock purchase rights to employees
and consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet the requirements Section 422 of the Code.
In 2003, eMagin established the 2003 Stock Option Plan (the "2003 Plan"). The
2003 Plan provided for the granting of options to purchase an aggregate of
9,200,000 shares of the common stock to employees and consultants. On July 2,
2003, the shareholders approved the plan and the 2003 Plan was subsequently
amended by the Board of Directors on July 2, 2003 to reduce the number of
additional shares that may be provided for issuance under the "evergreen"
provisions of the 2003 Plan. The amended 2003 Plan provides for an increase of
2,000,000 shares in January 2004 and an annual increase on January 1 of each
year for a period of nine (9) years commencing on January 1, 2005 of 3% of the
diluted shares outstanding.
Vesting terms of the options range from immediate vesting to a ratable vesting
period of 10 years. Option activity for the years ended December 31, 2003 and
2002 are summarized as follows:
52
Weighted
Average
Shares Exercise Price
------------ ------------
Outstanding at December 31, 2001 3,544,721 $ 2.41
Options granted 4,788,722 0.40
Options canceled (2,440,358) 2.11
------------ ------------
Outstanding at December 31, 2002 5,893,085 0.75
Options granted 7,528,676 0.42
Options exercised (859,993) 0.33
Options canceled (413,198) 2.14
------------ ------------
Outstanding at December 31, 2003 12,148,570 $ 0.53
============ ============
At December 31, 2003, there were 2,091,437 shares available for grant under the
2003 Plan, 2000 Plan and the 1994 Plan.
In October 2002, the Company's Board of Directors approved the issuance of
5,185,000 options to employees, officers and directors. These options were not
issued at the time of the Board of Directors' approval because there were not
enough options available to be issued. Pursuant to the Company's Stock Option
Plans, these options were issued concurrent with the approval of the 2003 Plan
at the July 2003 shareholders' meeting. The Company recorded a charge of
$1,808,000 in the year ended December 31, 2003 for the change in value of these
options from the original Board approval date in October 2002 to the shareholder
approval date in July 2003.
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercisable
Range of Exercise Prices Outstanding Life (In Years) Price Exercisable Price
------------------------ ----------------- ---------------- -------------- ---------------- ----------------
$ 0.18 - $1.02 10,616,901 4.23 $ 0.37 10,078,176 $ 0.35
$ 1.25 - $1.72 1,401,169 6.62 1.56 1,204,335 1.57
$ 2.25 - $6.30 130,500 4.67 2.47 119,750 2.40
---------- ------ ---------- -------
12,148,570 $ 0.53 11,402,261 $ 0.50
========== ====== ========== =======
[2] Stock based compensation:
Non-cash stock-based compensation expense represents expenses associated with
stock option grants to the Company's officers and employees at below fair market
value as additional compensation for their services and to induce them to
lock-up their options for a longer time than would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options.
[3] Warrants:
At December 31, 2003, 12,336,289 warrants to purchase shares of common stock are
issued, outstanding and exercisable at exercise prices ranging from $0.53 to
$1.93.
Note K - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities." Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46R requires a variable interest entity, as
defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN 46R were deferred until the period ending after March 15,
2004. The adoption of FIN 46R for provisions effective during 2003 did not have
a material impact on the Company's financial position, cash flows or results of
operations.
53
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." (SFAS No. 149), which amends
SFAS 133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying financial component to conform it to
language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (4) amends certain other existing pronouncements..
This statement is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. In
addition, most provisions of SFAS 149 are to be applied prospectively. The
adoption of this standard did not have a material impact on the Company's
financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150 , "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
FAS No. 150 changes the accounting for certain financial instruments that under
previous guidance issuers could be accounted for as equity. It requires that
those instruments be classified as liabilities in balance sheets. The guidance
in SFAS No. 150 is generally effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective on July 1, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
financial position, cash flows or results of operations.
Note L - COMMITMENTS AND CONTINGENCIES
[1] Royalty payments:
The Company, in accordance with a royalty agreement, is obligated to make
minimum annual royalty payments to a corporation commencing January 1, 2001. The
minimum annual royalty of $31,500 per year due under this agreement commences in
the first year of the agreement, and increases to minimum royalty payments of
$125,000 in 2006. Under this agreement, the Company must pay to the corporation
a certain percentage of net sales of certain products, which percentages are
defined in the agreement. The percentages are on a sliding scale depending on
the amount of sales generated. Any minimum royalties paid may be credited
against the amounts due based on the percentage of sales. The royalty agreement
terminates upon the expiration of the last-to-expire issued patent.
For the years ended December 31, 2003 and 2002, royalty expense of approximately
$115,000 and $61,000 respectively, is included in general and administrative
expense.
[2] Operating leases:
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2008. Certain leases provide
for payments of monthly operating expenses. The approximate future minimum lease
payments through 2008 are as follows:
Year ending December 31,
2004 $ 257,999
2005 18,372
2006 18,372
2007 6,124
2008 -
-------------
Total $ 300,867
=============
54
Rent expense for the years ended December 31, 2003 and 2002 was approximately
$839,738 and $1,107,000, respectively. eMagin's lease with IBM expires in March
2004. The Company is currently in the process of renewing the lease. eMagin's
lease with Redson Building Partners has been paid in advance with common stock
valued at $48,000 for the 2004 rent.
[3] Employment benefit plans:
eMagin has a defined contribution plan (the 401(k) Plan) under Section 401(k) of
the Internal Revenue Code, which is available to all employees who meet
established eligibility requirements. Employee contributions are generally
limited to 15% of the employee's compensation. Under the provisions of the
401(k)Plan, eMagin may match a portion of the participating employees'
contributions. There was no matching to the 401(k) Plan for the years ended
December 31, 2003 and 2002.
[4] Legal proceedings
The Company is subject to various claims and proceedings in the ordinary course
of business. The Company believes that none of these current claims or
proceedings individually or in the aggregate, will have a material adverse
impact on the Company; results of operations, cash flows or financial condition,
although it can make no assurances in this regard.
Note M - Related Party Transactions
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of eMagin's common stock
(subject to certain customary anti-dilution adjustments) (see Note I). Rainbow
Gate Corporation, a corporation in which Mortimer D.A. Sackler is the investment
manager, invested $500,000 in the Company under the agreement and received
pursuant to such investment (i) 723,275 shares of eMagin's common stock, and
(ii) warrants exercisable for 289,310 shares of eMagin's common stock. Mr.
Sackler is currently a beneficial owner of more than five percent of the
outstanding shares of eMagin's common stock.
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A. Sackler (the "Bridge Note")(see Note F(c)). The
secured note accrues interest at 11% per annum and was originally due to mature
on June 30, 2003 and was amended as a result of a financing we completed in
April 2003. The Company also granted warrants, exercisable for a period of five
years, to purchase 300,000 shares of common stock with an exercise price of
$0.4257 per share to the investor, provided, however, this warrant may not be
exercised by the investor so long as the investor is the beneficial owner,
directly or indirectly, of more than ten percent (10%) of the common stock of
eMagin for purposes of Section 16 of the Securities Exchange Act 1934. The fair
value of the warrants issued to this Investor, which approximated $84,000, has
been recorded as original issue discount, resulting in a reduction in the
carrying value of this debt. The original issue discount was amortized into
interest expense over the period of the debt. Pursuant to the April 2003
financing described below, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the investors to enter into a new security agreement with him on a
pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Restructuring Agreement whereby Investors agreed to lend eMagin
$6,000,000 in exchange for (i) the issuance of $6,000,000 principal amount of
9.00% Secured Convertible Promissory Notes due on November 1, 2005 (the "Secured
55
Notes") and (ii) Warrants (the "Warrants") to purchase an aggregate of 7,749,921
shares of common stock of eMagin (subject to certain customary anti-dilution
adjustments), which Warrants are exercisable for a period of three (3) years.
Mr. Rivkin, who at the time of the transaction was a member of our Board of
Directors, participated as an investor in the transaction and invested $125,000
in the Company. In return for such investment, Mr. Rivkin received (i) a Secured
Convertible Promissory Note in an aggregate principal amount of $125,000, and
(ii) warrants exercisable for 161,456 shares of eMagin's common shares. In
addition, Stillwater LLC, an entity controlled by Mr. Mortimer D.A. Sackler,
agreed to invest an aggregate of $2,600,000 under the transaction and will
receive (i) Secured Convertible Promissory Notes in an aggregate principal
amount of $2,600,000, and (ii) warrants exercisable for 3,358,300 of our common
shares. As part of the transactions, Messrs. Sackler and Rivkin, who were the
holders of an aggregate of $1,325,000 principal amount of secured notes that
were purchased pursuant to a secured note purchase agreement entered into as of
November 27, 2001 (collectively, the "Original Secured Notes"), and Mr. Sackler,
who additionally was the holder of a $200,000 principal Bridge Note, agreed to
(a) amend their respective Original Secured Notes and Bridge Note issued to
them, (b) terminate the Security Agreement dated November 20, 2001 that was
entered into in connection with the purchase of the Original Secured Notes and
the Security Agreements dated June 20, 2002 that were entered into in connection
with the purchase of the Bridge Note and allow the new investors to enter into a
New Security Agreement (as defined below) with them on a pari passu basis in
order for the Company to continue its operations as a developer of virtual
imaging technology. The amendments to the Original Secured Notes and Bridge Note
included (i) amending the Bridge Note so as to provide that the Bridge Note
shall be convertible and will have the same conversion price as the Notes issued
pursuant to the Secured Note Purchase Agreement, (ii) extending the maturity
dates of the Original Secured Notes and Bridge Note from June 30, 2003 to
November 1, 2005, and (iii) revising and clarifying certain of the other terms
and conditions of the Original Secured Notes and Bridge Note, including
provisions relating to interest payments, conversions, default and assignments
of the Original Secured Notes and Bridge Note. On April 25, 2003, Mr. Sackler
transferred all of his holdings in the Company to Stillwater LLC, a limited
liability company in which Mr. Sackler is the sole member.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised and warrants to purchase eMagin shares of common stock equal to
2.5% of the cash netted to eMagin. $283,503 and 43,651 common stock purchase
warrants exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.
Note - N Concentrations
For the year ended December 31, 2003, one company represented approximately 21%
of sales. For the year ended December 31, 2002, two customers accounted for
approximately 32% of sales.
For the year ended December 31, 2003, approximately 69% of the Company's sales
were made to customers in the United States and approximately 31% of the
Company's sales were made to international customers. For the year ended
December 31, 2002, 74% of the Company's sales were made to customers in the
United States and 26% of the Company's sales were made to international
customers.
The Company also purchases principally all of its wafers from a single supplier.
Note O - Subsequent Events
On January 9, 2004, we entered into a Securities Purchase Agreement with several
accredited institutional and private investors whereby such investors purchased
an aggregate of 3,333,364 shares of common stock for an aggregate purchase price
of $4,200,039. The Company also entered into a registration rights agreement
with the aforementioned investors with respect to the common stock issued and
common stock issuable upon the exercise of the warrants. The Company filed a
registration statement for the sales of these shares in February 2004.
56
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.26
per share. In addition, the investors received warrants to purchase an aggregate
of 2,000,019 shares of common stock (subject to anti-dilution adjustments)
exercisable at a price of $1.74 per share for a period of five (5) years. The
warrants were priced at a 10% premium to the average closing price of the stock
for the pricing period.
In connection with the private placement, eMagin also issued additional warrants
to the investors to acquire an aggregate of 2,312,193 shares of common stock.
1,206,914 of such warrants are exercisable, within 6 months from the effective
date of the registration statement covering these securities, at a price of
$1.74 per share (a 10% premium to the average closing price of the stock for the
pricing period), and 1,105,279 of such warrants are exercisable within 12 months
from the effective date of the registration statement covering these securities,
at a price of $1.90 per share (a 20% premium to the average closing price of the
stock for the pricing period).
In February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $74,000 on the Notes, into 11,394,621 shares of common
stock of eMagin. The listing of the shares issuable pursuant to such agreement
was approved by the American Stock Exchange. This debt, net of the unamortized
portion of debt discount and the beneficial feature, have been shown as a
long-term liability in the consolidated balance sheet.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "warrants"), which warrants
are exercisable at a price of $2.76 per share. 1.5 million of the warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission.
At December 31, 2003, the Company had approximately $1,189,000 and $512,000
unamortized debt discount and beneficial conversion feature, respectively, in
connection with the Notes. The remaining unamortized balance as of the
conversion date will be charged to operations.
In connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants.
57
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In September 2002, eMagin announced that it had appointed Grant Thornton as
its independent auditor for fiscal year 2002, replacing Arthur Andersen LLP. On
December 29, 2003, eMagin Corporation, (the "Company") notified Grant Thornton
LLP of its decision to terminate its business relationship with them. On
December 30, 2003, the Company engaged Eisner LLP as independent auditors of the
Company for the fiscal year ending December 31, 2003. The action to engage
Eisner LLP was taken upon the unanimous approval of the Audit Committee of the
Board of Directors of the Company.
During the last fiscal year ended December 31, 2002 and through December
29, 2003, (i) there were no disagreements between the Company and Grant Thornton
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of Grant Thornton would have caused Grant Thornton to make
reference to the matter in its reports on the Company's financial statements,
and (ii) Grant Thornton's reports did not contain an adverse opinion or a
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope, or accounting principles. During the last fiscal year ended December 31,
2002 and through December 29, 2003, there were no reportable events as the term
described in Item 304(a)(1)(iv) of Regulation S-B. Grant Thornton's opinion in
its report on the Company's financial statements for the year ended December 31,
2002, included an explanatory paragraph that described uncertainties regarding
the Company's ability to continue as a going concern.
During the two most recent fiscal years and through December 29, 2003, the
Company has not consulted with Eisner LLP regarding either:
1. the application of accounting principles to any specified transaction,
either completed or proposed, or the type of audit opinion that might
be rendered on the Company's financial statements, and neither a
written report was provided to the Company nor oral advice was provided
that Eisner LLP concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or
financial reporting issue; or
2. any matter that was either subject of disagreement or event, as defined
in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction
to Item 304 of Regulation S-B, or a reportable event, as that term is
explained in Item 304(a)(1)(iv)(A) of Regulation S-B.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was
performed under the supervision and with the participation of our management,
including the chief executive officer, or CEO, who is also the acting chief
financial officer, or CFO, of the effectiveness of the design and operation of
our disclosure procedures. Based on management's evaluation as of as of the end
of the period covered by this Annual Report, our principal executive officer and
acting principal financial officer has concluded that eMagin's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) were
sufficiently effective to ensure that the information required to be disclosed
by eMagin in the reports that we file under the Exchange Act is gathered,
analyzed and disclosed with adequate timeliness, accuracy and completeness.
Changes in internal controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above, nor were
there any significant deficiencies or material weaknesses in eMagin's internal
controls. Accordingly, no corrective actions were required or undertaken.
58
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones 48 Chairman, Chief Executive Officer, President and
Acting Chief Financial Officer
Dr. K. C. Park 66 President, Virtual Vision, Inc.
Susan K. Jones 52 Chief Marketing and Strategy Officer, Secretary
Claude Charles (1) 66 Director
Paul Cronson (1) 46 Director
Jacob (Jack) Goldman (2*) (3) 81 Director
Rear Admiral Thomas Paulsen, USN (Ret.) (2) 67 Director
Jack Rivkin (1*) (3*) 63 Director
Dr. Jill Wittels (2) 54 Director
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee
(*) Committee chairman
Gary W. Jones has served as Chairman, Chief Executive Officer, and
President of eMagin since 1992, and as Acting Chief Financial Officer since
August 2002. Mr. Jones has over 20 years of experience in both public and
private companies in the areas of business development, high volume
manufacturing, product development, research, and marketing. Prior to founding
FED Corporation/eMagin Corporation, Mr. Jones served as Director of the Device
Development and Processing division at MCNC Center for Microelectronics in North
Carolina from 1985 to 1992. From 1977 to 1985 Mr. Jones managed both
semiconductor manufacturing and research and development programs at Texas
Instruments. Mr. Jones received a B.S. in electrical engineering and physics
from Purdue University. Mr. Jones has served as a member of the Executive
Committee of the Board of the United States Display Consortium.
Dr. K.C. Park was named President of our wholly owned subsidiary, Virtual
Vision, Inc., in 2002 after serving as our Executive Vice President of
International Operations since 1998. During his twenty-seven year tenure with
IBM he managed flat panel display and semiconductor programs at the IBM Watson
Research Center, directed the corporate display programs at the IBM Corporate
Headquarters, and established Technical Operations in IBM Korea and served as
Senior Managing Director. Dr. Park joined LG Electronics in 1993 as Executive
Vice President and initiated and led corporate-wide efforts to shift the major
emphasis of the corporation into multimedia. Dr. Park holds a B.S. from the
University of Minnesota, an M.S. from MIT, and a Ph.D. in Solid State Chemistry
from the University of Minnesota and an MBA from New York University.
Susan K. Jones has served as Executive Vice President and Secretary since
1992, and assumed responsibility of Chief Marketing and Strategy Officer in
2001. Ms. Jones has 25 years of industrial experience, including senior
research, management, and marketing assignments at Texas Instruments and Merck,
Sharp, & Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs
committees for industry organizations including IEEE, SPIE, and SID. Ms. Jones
served as a director of eMagin Corporation from 1993 to 2000 and is a director
of Virtual Vision, Inc. Ms. Jones graduated from Lamar University with a B.S. in
chemistry and biology, holds more than a dozen patents, and has authored more
than 100 papers and talks.
Claude Charles has served as a director since April of 2000. Mr. Charles
has served as President of Great Tangley Corporation since 1999. From 1996 to
1998 Mr. Charles was Chairman of Equinox Group Holdings in Singapore. Mr.
Charles has also served as a director and in senior executive positions at SG
Warburg and Co. Ltd., Peregrine Investment Holdings, Trident International
Finance Ltd., and Dow Banking Corporation. Mr. Charles
59
holds a B.S. in economics from the Wharton School at the University of
Pennsylvania and a M.S. in international finance from Columbia University.
Paul Cronson has served as a director since July of 2003. Mr. Cronson is
Managing Director of Larkspur Capital Corporation, which he founded in 1992.
Larkspur is a broker dealer that is a member of the National Association of
Securities Dealers and advises companies seeking private equity or debt. Mr.
Cronson's career in finance began in 1979 at Laidlaw, Adams Peck where he worked
in asset management and corporate finance. From 1983 to 1985, Mr. Cronson worked
with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and
structured transactions. Subsequently from 1985 to 1987, he was employed by
Chase Investment Bank Ltd., where he structured international debt securities
and he developed "synthetic asset" products using derivatives. Returning to the
U.S., he joined Peter Sharp Co., where he managed a real estate portfolio,
structured financings and assisted with capital market investments from until
1992. Mr. Cronson received his BA from Columbia College in 1979, and his MBA
from Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet, in New York City, a private company specializing in email
based distributed applications and secure messaging.
Dr. Jack Goldman joined our board of directors in February of 2003. Dr.
Goldman is the retired senior vice-president for R&D and chief technical officer
of the Xerox Corporation. While at Xerox, he founded and directed the celebrated
Xerox PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford
Motor Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
Admiral Thomas Paulsen has served as a director since July 2003. Admiral
Thomas Paulsen served for over 34 years in the US Navy in Command Control,
Communications and Intelligence (C3I), Telecommunications, Network Systems
Operations, Computers and Computer Systems Operations until his retirement in
1994 as a Rear Admiral. He then served as Chief Information Officer for Williams
Telecommunications. Admiral Paulsen has served as a director Umbanet, Inc. since
2002. Since 2000, Admiral Paulsen has served on the Board of Governors of the
Institute of Knowledge Management, George Washington University. Since 1994, he
has served as the Chairman of the Advisory Board and President Emeritus of the
Center for Advanced Technologies (CAT) and a Managing Partner on the National
Knowledge and Intellectual Property Management Taskforce, a not-for-profit
company headquartered in Dallas, Texas, and is a member of the Board of
Governors for the Japanese American National Museum, Los Angeles, California.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is
Executive Vice President and Chief Investment Officer of Neuberger Berman, a
Lehman Brothers Company. He previously served as Executive Vice President of
Citigroup Investments Inc., through which the Travelers Group investments in the
Company were managed. He also served as Vice Chairman and a director of Smith
Barney, and held positions at Procter and Gamble, Mitchell Hutchins, Paine
Webber and Lehman Brothers. Mr. Rivkin holds an engineering degree in metallurgy
from the Colorado School of Mines and an MBA from Harvard University.
Dr. Jill Wittels has served as a director since July 2003. Since February
2001, Dr. Wittels has been the Corporate Vice President, Business Development
for L-3 Communications, a merchant supplier of intelligence, surveillance and
reconnaissance systems and products, secure communications systems and products,
avionics and ocean products, training devices and services, microwave components
and telemetry, instrumentations, space and navigation products. Dr. Wittels has
over 25 years of management, engineering and leadership experience. Prior to L-3
Communications, Dr. Wittels worked for 21 years with BAE Systems and its
predecessor companies, including Lockheed Martin, Loral and Honeywell. Most
recently, she served as vice president and general manager of BAE Systems'
Information and Electronic Warfare Systems/Infrared and Imaging Systems
division. Dr. Wittels began her career as a systems engineer and has also served
as a Congressional Fellow for the American Physical Society, a research
associate at Massachusetts Institute of Technology and a senior visiting
scientist for the National Academy of Sciences. Dr. Wittels received a Bachelor
of Science degree in Physics from MIT in 1970 and received a PhD in Physics from
MIT in 1975. She serves on the Board of Overseers for the Department of Energy's
Fermi National
60
Accelerator Lab, is a member of the American Physical Society and a member of
the American Astronomical Society. Dr. Wittels presently serves on the Boards of
Directors of Innovative Micro Technology Inc. and of Millivision Inc.
General Information Concerning the Board of Directors. The Board of
Directors of eMagin is classified into three classes: Class A, Class B and Class
C. Each Class A director will hold office until the 2005 Annual Meeting of our
stockholders. Currently, Mr. Gary Jones and Mr. Jack Rivkin are the Class A
directors. Each Class B director will hold office until the 2006 Annual Meeting.
Mr. Paul Cronson and Admiral Thomas Paulsen are Class B directors. Class C
directors will hold office until the 2004 Annual Meeting. Currently, Mr. Claude
Charles, Dr. Jill Wittels and Dr. Jacob Goldman are the Class C directors. In
each case, each director will hold office until his successor is duly elected or
appointed and qualified in the manner provided in eMagin's Amended and Restated
Certificate of Incorporation and our Amended and Restated Bylaws, or as
otherwise provided by applicable law.
Additional information required by this item will be contained under the
captions "Election of Class C Directors," "Section 16(a) Beneficial Ownership
Reporting Compliance" and "Executive Compensation" in eMagin's definitive proxy
statement with respect to our 2004 Annual Meeting of Stockholders to be filed
with the SEC (the "Proxy Statement"), and is hereby incorporated by reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all
of our directors, officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer. The Code
of Business Conduct and Ethics will be posted on our website at
http://www.emagin.com/investors.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this Code of Business
Conduct and Ethics by posting such information on our website, at the address
and location specified above and, to the extent required by the listing
standards of the American Stock Exchange, by filing a Current Report on Form 8-K
with the SEC, disclosing such information.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Proxy Statement
under the caption "Executive Compensation," and is hereby incorporated by
reference thereto.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The other information required by this Item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is hereby incorporated by reference thereto.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Proxy Statement
under the caption "Certain Transactions," and is hereby incorporated by
reference thereto.
ITEM 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be contained in the Proxy Statement
under the caption "Auditors' Fees," and is hereby incorporated by reference
thereto.
61
PART IV.
ITEM 14. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Fashion Dynamics Corp., FED Capital
Acquisition Corporation and FED Corporation dated March 13, 2000, as filed
in the Registrant's Form 8-K/A Report (file no. 001-15751) incorporated
herein by reference.
3.1 Amended and Restated Articles of Incorporation, as filed in the
Registrant's Proxy dated June 14, 2001, incorporated herein by reference.
3.2 Amended Articles of Incorporation, as filed in the Registrant's Proxy dated
June 13, 2003, incorporated herein by reference.
3.3 Bylaws, as filed in the Registrant's Proxy dated June 14, 2001,
incorporated herein by reference.
4.1 Form of Warrant dated as of April 25, 2003 filed April 28, 2003, as filed
in the Registrant's Form 8-K incorporated herein by reference.
4.2 Form of Series A Common Stock Purchase Warrant dated as of January 9, 2004.
Incorporated herein by reference to our January 9, 2004 Form 8-K.
4.3 Form of Series B Common Stock Purchase Warrant dated as of January 9, 2004.
Incorporated herein by reference to our January 9, 2004 Form 8-K.
4.4 Form of Series C Common Stock Purchase Warrant dated as of January 9, 2004.
Incorporated herein by reference to our January 9, 2004 Form 8-K.
4.5 Form of Series D Warrant.
4.6 Form of Series E Warrant.
10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8 (file no.
333-32474) incorporated herein by reference.
10.2 2003 Stock Option Plan, as filed in the Registrant's Proxy dated June 13,
2003, incorporated herein by reference.
10.3 Nonexclusive Field of Use License Agreement relating to OLED Technology for
miniature, high resolution displays between the Eastman Kodak Company and
FED Corporation dated March 29, 1999, as filed in the Registrant's Form
10-K/A for the year ended December 31, 2000 incorporated by reference
herein.
10.4 Amendment Number 1 to the Nonexclusive Field of Use License Agreement
relating to the OLED Technology for miniature, high resolution displays
between the Eastman Kodak Company and FED Corporation dated March 16, 2000,
as filed in the Registrant's Form 10-K/A for the year ended December 31,
2000 incorporated by reference herein.
62
10.5 Amendment Number 1 to the Lease between International business Machines
Corporation and FED Corporation dated July 9, 1999, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000 incorporated
by reference herein.
10.6 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999, as filed in the Registrant's Form 10-K/A
for the year ended December 31, 2000 incorporated by reference herein.
10.7 Amendment Number 2 to the Lease between International Business Machines
Corporation and FED Corporation dated January 29, 2001, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000 incorporated
by reference herein.
10.8 Secured Note Purchase Agreement entered into as of November 27, 2001, by
and among eMagin Corporation and certain investors named therein, as filed
in the Registrant's Form 8-K dated December 18, 2001 incorporated herein by
reference.
10.9 Securities Purchase Agreement dated as of April 25, 2003 by and among
eMagin and the investors identified on the signature pages thereto, filed
April 28, 2003, as filed in the Registrant's Form 8-K incorporated herein
by reference.
10.10 Registration Rights Agreement dated as of April 25, 2003 by and among
eMagin and certain initial investors identified on the signature pages
thereto filed April 28, 2003, as filed in the Registrant's Form 8-K
incorporated herein by reference.
10.11 Securities Purchase Agreement dated as of January 9, 2004 by and among
eMagin and the investors identified on the signature pages thereto, filed
January 9, 2004, as filed in the Registrant's Form 8-K incorporated herein
by reference.
10.12 Registration Rights Agreement dated as of January 9, 2004 by and among
eMagin and certain initial investors identified on the signature pages
thereto. Incorporated herein by reference to our January 9, 2004 Form 8-K.
10.13 Master Amendment Agreement dated as of February 17, 2004 by and among
eMagin and the investors identified on the signature pages thereto, filed
March 4, 2004, as filed in the Registrant's Form 8-K incorporated herein
by reference.
10.14 Registration Rights Agreement dated as of February 17, 2004 by and among
eMagin and certain initial investors identified on the signature pages
thereto, filed March 4, 2004.
10.15 Letter Agreement amending the Master Amendment Agreement dated as of March
1, 2004 by and among eMagin and the parties to the Master Amendment
Agreement, filed March 4, 2004,, as filed in the Registrant's Form 8-K
incorporated herein by reference.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountant.
31.1 Certification by Chief Executive Officer and Acting Chief Financial Officer
pursuant to Sarbanes Oxley Section 302.
32.1 Certification by Chief Executive Officer and Acting Chief Financial Officer
pursuant to 18 U.S. C. Section 1350
63
(B) Reports on Form 8-K
The Company filed eight (8) reports on form 8-K during the year ended
December 31, 2003. Information regarding the items reported on is as follows:
January 15, 2003 Disclosed that eMagin and Travelers agreed to extend
the maturity date of the Convertible Promissory Note from
December 31, 2002 to January 31, 2003.
Disclosed that eMagin and Mr. Mortimer D.A. Sackler agreed to
extend the maturity date of the Secured Convertible Note
December 31, 2002 to January 31, 2003.
Disclosed that eMagin and Ginola Limited agreed to extend the
maturity date of the Secured Convertible Note from December
31, 2002 to January 31, 2003.
Disclosed that eMagin and Jack Rivkin agreed to extend the
maturity date of the Secured Convertible Note from December
31, 2002 to January 31, 2003.
February 7, 2003 Disclosed that eMagin and Travelers agreed to extend
the maturity date of the Convertible Promissory Note from
January 31, 2003 to February 28, 2003.
Disclosed that eMagin and Mr. Mortimer D.A. Sackler agreed to
extend the maturity date of the Secured Convertible Note
January 31, 2003 to March 31, 2003.
Disclosed that eMagin and Ginola Limited agreed to extend the
maturity date of the Secured Convertible Note from January
31, 2003 to March 31, 2003.
Disclosed that eMagin and Jack Rivkin agreed to extend the
Maturity date of the Secured Convertible Note from January
31, 2003 to March 31, 2003.
March 7, 2003 Disclosed that eMagin and Travelers agreed to extend the
maturity date of the Convertible Promissory Note from
February 28, 2003 to June 30, 2003.
Disclosed that eMagin and Mr. Mortimer D.A. Sackler agreed to
extend the maturity date of the Secured Convertible Note
March 31, 2003 to June 30, 2003.
Disclosed that eMagin and Ginola Limited agreed to extend the
maturity date of the Secured Convertible Note from March 31,
2003 to June 30, 2003.
April 28, 2003 Disclosed that eMagin had completed a $6 million
financing as of April 25, 2003, and that the holders of its
Convertible Promissory Note and Secured Convertible Notes
that were set to mature on June 30, 2003 had either agreed to
convert their debt into equity of the Company or had agreed
to extend the maturity date of their Notes to
November 1, 2005.
Disclosed that eMagin entered into a registration agreement
with the above investors.
June 11, 2003 Gary W. Jones, President and CEO of eMagin Corporation
entered into a written trading plan relating to the future
sales of part of his shares of eMagin's common stock. This
plan is intended to enable Mr. Jones to sell shares over a
period of time without unduly affecting the market. This plan
has a term of six months and expires on December 12, 2003.
64
June 23, 2003 Gary W. Jones terminated his trading plan from June 11, 2003.
July 3, 2003 The Company announced the results of the 2003 Annual Meeting.
The Board of Directors approved two amendments to the
Companies 2003 Stock Option Plan; (i) reduce the number of
shares that may be provided under the "evergreen" provisions
and (ii) require shareholder approval for any subsequent
increase.
December 29, 2003 On December 29, 2003, eMagin Corporation notified Grant
Thornton LLP of its decision to terminate its business
relationship with them. On December 30, 2003, the Company
engaged Eisner LLP as independent auditors of the Company for
the fiscal year ending December 31, 2003.
65
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EMAGIN CORPORATION
BY: /s/ Gary Jones
--------------
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND ACTING CHIEF
FINANCIAL OFFICER
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME TITLE DATE
/s/ Gary Jones President, Chief Executive Officer, and April 12, 2004
--------------------------- Acting Chief Financial Officer and Director
Gary Jones (Principal Executive Officer)
/s/ Claude Charles Director April 12, 2004
---------------------------
Claude Charles
/s/ Paul Cronson Director April 12, 2004
---------------------------
Paul Cronson
/s/ Jack Goldman Director April 12, 2004
---------------------------
Dr. Jacob E Goldman
/s/ Thomas Paulsen Director April 12, 2004
-------------------------
Thomas Paulsen
/s/ Jack Rivkin Director April 12, 2004
---------------------------
Jack Rivkin
/s/ Jill Wittels Director April 12, 2004
---------------------------
Jill Wittels
66